Federal Court of Appeal Decisions

    

     A-233-96

CORAM:      THE CHIEF JUSTICE

         MARCEAU J.A.

         HEALD D.J.

BETWEEN:

     GEORGE LACINA,

     Applicant,

     - and -

     HER MAJESTY THE QUEEN,

     Respondent.

     REASONS FOR JUDGMENT

HEALD D.J.

     This is an application for judicial review of a decision of the Tax Court of Canada¹ which decision dismissed the applicant's appeal from a notice of re-assessment of Goods and Services Tax (GST) for the period from January 1, 1991 to March 31, 1993. The GST was assessed against the applicant in respect of two of three houses built by the applicant in British Columbia (House No. 1 and House No. 3). The Learned Tax Court Judge determined that the applicant was liable for GST under the self-supply rules set out in section 191 of the Excise Tax Act.² For the reason given below, the Minister assessed the applicant's spouse for GST on the sale of House No. 2. She objected to the assessment and filed a Notice of Appeal to the Tax Court, but her appeal was withdrawn prior to the hearing.

THE FACTS

     The applicant was a self-employed carpet cleaner. His total income for the years 1990, 1991 and 1992 was, respectively, $12,399.96, $21,421.58 and $24,528.86. The applicant's position is that he has never been engaged as a professional builder of residential real estate. Nevertheless, it is an accepted fact that during the relevant period supra, he built and sold three residential real estate complexes. The Tax Court Judge found that the applicant had established an operational pattern whereby he would purchase a lot, arrange short-term financing, build a house on the lot, and then, after residing therein for a very short period, sell the house at a profit. The applicant did not build these houses himself. Rather, he hired architects and members of the various building trades to erect the houses. He did not charge GST on any of these sales.

House No. 1      (52 Timbercrest Drive, Port Moody, B.C.)

     The applicant purchased the lot for $89,000 on April 30, 1991. A mortgage for $160,000.00 was placed on the property. The applicant listed himself as the contractor on the application form for the building permit. The house was substantially completed by October 1991. The applicant then moved into the house with his family. On December 3, 1991, the house was sold for $315,000.00. The applicant said that he sold the house because he was unable to afford the mortgage payments. Furthermore, he had separated from his wife.

House No. 2      (7 Foxwood Court, Port Moody, B.C.)

     The applicant's wife, Anna, purchased the lot for $99,500.00 on December 16th, 1991. The applicant and his wife borrowed on House No. 2 in the amount of $130,000.00, repayable in six months at an interest rate of 18%. The applicant was listed on the building permit as the contractor. The applicant's wife lived in House No. 2 for a short time. On July 2, 1992, she sold the house for $299,000.00. In evidence, the applicant said that his wife sold the property because houses in that area were repeatedly hit and damaged by falling trees.

House No. 3      (2633 Panorama Drive, Coquitlam, B.C.)

     This lot was purchased by the applicant on July 15, 1992, for $114,900.00. As was the case in the first two houses, the applicant again listed himself as a contractor on the application for a building permit. The construction of this house was financed by a mortgage in the sum of $150,000.00 repayable in six months at an interest rate of 10%. The applicant moved into House No. 3 sometime between September and December of 1992. On March 30, 1993, House No. 3 was sold for $390,000.00. He said that he sold this house because its foundation had cracked and leaked. He did not address the foundation problems before the sale of the property.

THE DECISION OF THE TAX COURT

     The Tax Court Judge dismissed the applicant's appeal from the Minister's re-assessment. He made the following findings:

(1)      He concluded that the applicant was a "builder" within the meaning of ss. 123(1) of the Excise Tax Act. He so concluded because of the evidence to the effect that the applicant engaged other persons to construct his houses in a manner which exhibited an adventure in the nature of trade. His consistent pattern was: to purchase a lot, obtain short-term financing, arrange for construction of a house and live in it for a short period of time before selling it. It was also noteworthy that the applicant listed himself on all three building permit applications as the contractor.

(2)      He found that the applicant was liable to pay GST on the self-supply of Houses No. 1 and 3 pursuant to the provisions of ss. 191(1) of the Act. He also found that ss. 191(5) was not available to the applicant so as to exempt him from the self-supply rule in ss. 191(1).

ANALYSIS

     This application raises two specific issues:

(I)      Was this applicant a "builder" within the meaning of ss. 123(1) of Excise Tax Act?3

(II)      Does the personal use exemption set out in ss. 191(5) of that Act apply to the circumstances of this case?4

(I)      Was the Applicant Herein a "Builder" as that Term is Employed in ss. 123(1) of the Excise Tax Act?

     On the facts of this case, the Tax Court Judge found that this applicant fell within the definition of "builder" set out supra. In my respectful view, he did not make any reviewable error in so finding. The applicant was clearly engaged in the construction and sale of one or more houses in the course of an "adventure in the nature of trade". His operations formed a definite pattern. The individual transactions for the sale of his houses were remarkably similar. In every case, he purchased the lots, arranged for construction and then sold the completed houses to purchasers after short periods of family occupation. He sold three up-market houses in less than two years.

     On every occasion, he listed himself as the contractor when applying for building permits. On every occasion, he employed short-term financing. These circumstances lead to the inescapable conclusion that his intention, at the outset, was to resell the houses for a profit almost immediately after completion. These were expensive houses on valuable lots; each house was ultimately sold by the applicant for in excess of $290,000.00. In my view, this conclusion by the Learned Tax Court Judge was reasonably open to him on this record.⁵

     Since the applicant was a builder within the meaning of the Act, he clearly fell within the self-supply rules set out in ss. 191(1). The relevant part of ss. 191(1) reads:

191.(1) For the purposes of this Part, where

(a) the construction or substantial renovation of a residential complex that is a single unit residential complex or a residential condominium unit is substantially completed,

(b) the builder of the complex

...

(iii) where the builder is an individual, occupies the complex as a place of residence, and

(c) the builder ... is the first individual to occupy the complex as a place of residence after substantial completion of the construction or renovation,

the builder shall be deemed

(d) to have made and received, at the later of the time the construction or substantial renovation is substantially completed and the time possession of the complex is so given to the particular person or the complex is so occupied by the builder, a taxable supply by way of sale of the complex, and

(e) to have paid as a recipient and to have collected as a supplier, at the later of those times, tax in respect of the supply calculated on the fair market value of the complex at the later of those times.

     Accordingly, it seems apparent that liability for the GST is incurred under the self-supply rule when the builder is an individual who, after construction of the residential complex was substantially completed, was the first to occupy that complex as a place of residence.

     On the record, it is beyond dispute that the applicant occupied Houses No. 1 and 3 as places of residence before selling them and that he was the first occupant after the construction of each was substantially completed. Accordingly, the applicant is deemed to have sold each of the houses to himself at either:

     a) the date of substantial completion of construction, or

     b) the date of occupation, whichever is the later date.

     Therefore, unless the personal use exemption in ss. 191(5) is available to him, the applicant is liable for GST based on the fair market value of each of the houses at that date.

(II) The Personal Use Exemption in SS. 191(5)

     A builder otherwise subjected to the self-supply rule is exempted under subsection (5) provided the four criteria therein set out are present:

(a)      the builder is an individual;

(b)      at any time after the construction or renovation of the complex or addition is substantially completed, the complex is used primarily as a place of residence for the individual, an individual related to the individual or a former spouse of the individual;

(c)      the complex is not used primarily for any other purpose between the time the construction or renovation is substantially completed and that time; and

(d)      the individual has not claimed an input tax credit in respect of the acquisition of or an improvement to the complex.

     There can be no doubt that this applicant meets criterion (a). I also agree that criterion (d) has been satisfied. It is apparent from the record that the applicant did not file a return at any time claiming the input tax credits in accordance with subsection 169(4) of the Act. When he objected to the assessment of GST against him, his main argument was that the self-supply rules ought not to have been applied to him, either because he was not a "builder" within the meaning of the Act or because he was exempt under ss.191(5). In response to his notice of objection, an appeals officer of Revenue Canada affirmed the finding that he was liable for the GST, but granted to him some of the input tax credits claimed in the alternative.

     There remains for consideration the question as to whether criteria (b) and (c) have been met in the circumstances of this case. It is the submission of the applicant that the word "primarily" as used in ss. 191(5) refers to the amount of space dedicated to a residence and not the enduring quality of the residence therein. On the other hand, the respondent submits that, used in this context, the word "primarily" refers to a personal intention to live there permanently and not to use the property as stock-in-trade or, in other words, as a disposable asset.

     I agree with the interpretation suggested by counsel for the respondent. The self-supply rules are designed to prevent a builder from gaining any advantage from occupying a residential complex, which is a part of his inventory, for a short time before selling it.⁶

     Based on this interpretation of ss. 191(5), I conclude that the Learned Tax Court Judge correctly decided, on this record, that the applicant did not occupy Houses No. 1 or No. 3 primarily as places of residence. The occupants remained in House No. 1 for a period of approximately 2 to 4 months, and in House No. 3 for a period of approximately 4 to 7 months. The applicant's activities established an unmistakable pattern of operation. Clearly, the applicant built and sold the houses over a short period of time as an adventure in the nature of trade. His residence in these two houses did not possess the enduring quality required to support a finding that he occupied either of them "primarily as a place of residence".

     For all of the above reasons, I would dismiss the within application for judicial review.

                         "Darrel V. Heald"

                         Deputy Judge

     A-233-96

CORAM:      THE CHIEF JUSTICE

     MARCEAU J.A.

     HEALD D.J.

BETWEEN:

     GEORGE LACINA,

     Applicant,

     - and -

     HER MAJESTY THE QUEEN,

     Respondent.

     REASONS FOR JUDGMENT

THE CHIEF JUSTICE

         I have read, in draft, the reasons for judgment of Deputy Judge Heald and my brother, Marceau J.A., in this section 28 application. I am in agreement both with their conclusions and their reasons. Like them, I, too, would dismiss the section 28 application.

                         "Julius A. Isaac"                              C.J.     

     A-233-96

CORAM:      THE CHIEF JUSTICE

     MARCEAU J.A.

     HEALD D.J.

BETWEEN:

     GEORGE LACINA

     Applicant

     - and -

     HER MAJESTY THE QUEEN

     Respondent

     REASONS FOR JUDGMENT

MARCEAU J.A.

     I have had the advantage of reading, in draft, the reasons for judgment prepared by Heald D.J. I readily agree with his conclusion and I have no difficulty with his reasons. It was common ground between the parties that the key issue in this case was whether the applicant, as a builder, satisfied the requirement in paragraph (b) of the exempting provision contained in subsection 191(5) of the Excise Tax Act, R.S.C. 1985, c. E-15; namely, having used the houses himself "primarily as a place of residence".⁷ The proper resolution of this issue obviously turns on the meaning to be attributed to that expression.

     In my respectful view, the suggestion by the applicant that the expression refers strictly to the amount of space in the house used as a personal residence, and not to the enduring quality of the use thereof, is simply unsound. The applicant's interpretation of the expression makes little sense in light of Parliament's legislative intent in enacting the personal use exemption, which is to treat a builder who exceptionally builds for himself in the same manner as if he was not a builder by exempting him from the self-supply rule; a provision which has as its very purpose the elimination of any tax advantage which could otherwise be gained by a builder by occupying a residential complex for a short period of time before selling it. Only by interpreting the word "primarily" as referring to the primary intention of the builder to use the house as his personal residence, and not merely as a stock-in-trade, do we have a consistent taxation regime with the following general rules founded upon a principled line between residential real estate transactions that attract GST liability and those that do not:

"      Any individual who self-builds a house for personal use, whether (s)he is classed as a "builder" under the Act or not, is exempt from GST liability on the additional value of assembly and construction, although GST would still have to be paid on the inputs purchased. If the individual is not a "builder", (s)he falls outside of the self-supply rule in ss. 191(1). If the individual is a "builder", (s)he is exempted by virtue of ss. 191(5).

"      A "builder" who builds a house for sale to a third party buyer has to collect GST on the sale at fair market value, whether or not the builder occupies the house temporarily before sale. If it is a direct sale, the builder must collect GST from the buyer. If the builder occupies the house first, the builder must collect GST from him- or herself as a deemed sale under the self-supply rules. The subsequent sale to the buyer would then be an exempt supply. In either case, the builder is entitled to claim input tax credits to reduce the GST liability.

     "Louis Marceau"

     J.A.

     A-233-96

CORAM:      THE CHIEF JUSTICE

     MARCEAU J.A.

     HEALD D.J.

BETWEEN:

     GEORGE LACINA

     Applicant

     - and -

     HER MAJESTY THE QUEEN

     Respondent

Heard at Vancouver, British Columbia, on Friday, June 20, 1997.

Judgment rendered at Ottawa, Ontario, on Thursday, July 17, 1997.

REASONS FOR JUDGMENT BY:      HEALD D.J.

CONCURRING REASONS BY:      THE CHIEF JUSTICE

CONCURRING REASONS BY:      MARCEAU J.A.

     IN THE FEDERAL COURT OF APPEAL

     A-233-96

BETWEEN:

     GEORGE LACINA

     Applicant

     - and -

     HER MAJESTY THE QUEEN

     Respondent

     REASONS FOR JUDGMENT

__________________

     ¹      Paragraph 28(1)(l) of the Federal Court Act .

     ²      R.S.C. 1985, c. E-15, as amended ["Excise Tax Act "].

     ³      SS. 123(1) reads:... "builder" of a residential complex or of an addition to a multiple unit residential complex means a person who
     (a) at a time when the person has an interest in the real property on which the complex is situated, carries on or engages another person to carry on for the person
         (i)      in the case of an addition to a multiple unit residential complex, the construction of the addition to the multiple unit residential complex,
         (ii)      in the case of a residential condominium unit, the construction of the condominium complex in which the unit is situated, and
         (iii)      in any other case, the construction or substantial renovation of the complex,
     (b) acquires an interest in the complex at a time when
         (i)      in the case of an addition to a multiple unit residential complex, the addition is under construction, and
         (ii)      in any other case, the complex is under construction or substantial renovation,
     (c) in the case of a mobile home or floating home, makes a supply of the home before the home has been used or occupied by any individual as a place of residence,
     (d) acquires an interest in the complex              (i)      in the case of a condominium complex or residential condominium unit, at a time when the complex is not registered as a condominium, or
         (ii)      in any case, before it has been occupied by an individual as a place of residence or lodging,
     for the primary purpose of
         (iii)      making one or more supplies of the complex or parts thereof or interests therein by way of sale, or
         (iv)      making one or more supplies of the complex or parts thereof by way of lease, licence or similar arrangement to persons other than to individuals who are acquiring the complex or parts otherwise than in the course of a business or an adventure or concern in the nature of trade, or
     (e) in any case, is deemed under subsection 190(1) to be a builder of the complex,
     but does not include
     (f) an individual described in paragraph (a), (b) or (d) who
         (i)      carries on the construction or substantial renovation,
         (ii)      engages another person to carry on the construction or substantial renovation for the individual, or
         (iii)      acquires the complex or interest in it,
     otherwise than in the course of a business or an adventure or concern in the nature of trade,
     (g) an individual described in paragraph (c) who makes a supply of the mobile home or floating home otherwise than in the course of a business or an adventure or concern in the nature of trade, or
     (h) a person described in any of paragraphs (a) to (c) whose only interest in the complex is a right to purchase the complex or an interest in it from a builder of the complex;

     ⁴      SS. 191(5) reads: Subsections (1) to (4) do not apply to a builder of a residential complex or an addition to a residential complex where
     (a)      the builder is an individual;
     (b)      at any time after the construction or renovation of the complex or addition is substantially completed, the complex is used primarily as a place of residence for the individual, an individual related to the individual or a former spouse of the individual;
     (c)      the complex is not used primarily for any other purpose between the time the construction or renovation is substantially completed and that time; and
     (d)      the individual has not claimed an input tax credit in respect of the acquisition of or an improvement to the complex.

     ⁵      This view of the matter is further supported by the adverse credibility finding in respect of "some of the testimony" of the applicant - see reasons of Tax Court Judge p. 9.

     ⁶      Compare: Beau Rivage Apartments v. Canada, [1994] T.C.J. No. 1137 (QL) per Kempo T.C.J.; Strumecki v. Canada, 96 G.S.T.C. 3090 (T.C.C.), per Beaubier T.C.J.; Genge v. Canada, 96 G.S.T.C. 39 (T.C.C.), per Christie T.C.J.

     ⁷      For convenience, I reproduce again subsection 191(5):
             191.      (5)      Subsections (1) to (4) do not apply to a builder of a residential complex or an addition to a residential complex where              ( a)      the builder is an individual;              ( b)      at any time after the construction or renovation of the complex or addition is substantially completed, the complex is used primarily as a place of residence for the individual, and individual related to the individual or a former spouse of the individual;              ( c)      the complex is not used primarily for any other purpose between the time the construction or renovation is substantially completed and that time; and              ( d)      the individual has not claimed an input tax credit in respect of the acquisition of or an improvement to the complex.