Date: 20000914
Docket: 2000-1366-GST-I
BETWEEN:
VILLA RIDGE CONSTRUCTION LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bowman, A.C.J.
[1] This is an appeal from an assessment made under the Goods and Services Tax provisions of the Excise Tax Act.
[2] By that assessment the Minister of National Revenue assessed GST on the basis that the appellant, whose business was the construction and sale of residential properties, had constructed a single unit residential complex located at 25 Derrick Court, Saint John, New Brunswick, and rented it to an individual on or about October 1, 1998 at a time when it had a fair market value of $82,300.
[3] On the basis of these facts the Minister assessed GST under subsection 191(1) of the Excise Tax Act, alleging that there was a deemed taxable supply by way of sale at the later of completion of construction or the giving of possession of the complex, based on the fair market value of $82,300.
[4] The appellant's position may be summarized as follows.
(1) The fair market value was not $82,300 and the use of values established for realty tax assessments is unacceptable because such values are notoriously inaccurate. I tend to agree that values for municipal tax assessments are unreliable. I have however no evidence to rebut the respondent's assumption of $82,300. Moreover, the property was sold in August 1999 for $81,500 and the cost of construction was $85,000. I see no basis for disagreeing with the respondent's assumed value of $82,300.
(2) It is beyond the constitutional competence of the province to delegate to the Government of Canada the administration of the provincial tax part of the Harmonized Sales Tax ("HST") which consists essentially of a combination of the provincial sales tax and the GST. The appellant relies upon the decision of the Supreme Court of Canada in Atty.-Gen. of Nova Scotia v. Atty.-Gen. of Canada, 50 DTC 838, which holds essentially that provincial legislatures and Parliament cannot delegate legislative powers to each other. This is settled law, but it is not what we are dealing with here. It is merely a delegation to the Minister of National Revenue by a provincial legislature, sovereign within its own field of legislative competence, of certain functions relating to the collection and administration of a provincially imposed tax. The point was dealt with at some length by Hamlyn J. in Guillemette v. The Queen, 97 DTC 1347, and by me in a case of the same name (98 DTC 1555), in which I followed the decision of Hamlyn J. The judgment of Hamlyn J. was affirmed: 99 DTC 5204 (F.C.A.).
(3) The requirement that taxpayers collect, administer and process the HST without compensation is cruel and unusual treatment. This contention is presumably based on section 12 of the Canadian Charter of Rights and Freedoms which provides that everyone has the right not to be subjected to any cruel and unusual treatment or punishment.
No notice was given under section 57 of the Federal Court Act but I can deal briefly with the argument because I do not propose to accept it. The prohibition in section 57 of the Federal Court Act, assuming that Parliament can constitutionally erect a procedural barrier to raising arguments based on the supreme law of this country, is not against hearing arguments on the constitutionality of legislation without notice being given to the various Attorneys General; rather it is against giving effect to such arguments by striking down legislation without the proper notice being given.
I do not think that the requirement that taxpayers collect and remit GST, or for that matter perform any of the other administrative tasks that our self-assessing system requires be done under the Excise Tax Act or the Income Tax Act constitutes cruel and unusual treatment as I understand those words. No doubt many of these unpaid administrative duties are time consuming, exasperating and onerous. That is not, however, an unduly heavy price to pay for living under a self-assessing fiscal regime. It may well be that some people regard the requirement to pay tax as cruel. Whatever merit there may be in this view it is, however, certainly not unusual.
(4) The appellant, through its agent and principal shareholder, Gerald Webster, contends that in fact the property was sold for $40,000 and that the GST or HST should be based on this figure.
That is not exactly what happened. A statement of adjustments dated "as of October 1, 1998" was put in evidence. It shows the appellant as vendor and John F. O'Brien as purchaser. The sale price was said to be $40,000, with HST of $6,000 less a GST rebate of $1,008 for a balance of $44,892. The deed relating to this purported transaction was in fact registered in the Registry Office on May 27, 1999.
The next document is another statement of adjustments dated "as of October 1, 1998" showing a sale of the property from John F. O'Brien to Gerald D. Webster for $46,000. No GST or HST was shown as payable on this purported second sale. The deed relating to this purported transaction was also registered on May 27, 1999. The lawyers who acted in these purported transactions were Zed & Company, not the appellant's usual lawyers, Patterson Palmer Hunt Murphy.
A further statement of adjustments dated August 3, 1999 was produced showing a sale price of $81,500. The vendor was shown as the appellant and the purchasers were two individuals. The grantor in the deed is, however, Gerald Webster.
Mr. Webster stated that the "profit" on the transaction was not declared by him and that the proceeds were taken into account not by him but by the appellant, who in fact showed a loss.
I do not think that the purported transfers between the appellant and Mr. O'Brien or between Messrs. O'Brien and Webster were genuine or were intended to create real legal relations. They were designed after Mr. Webster became aware of the tax consequences under section 191 of leasing the property in order to reverse that effect. He admitted on cross-examination that the transfers were "probably" backdated. For "probably" read "unquestionably". Even the $6,000 HST shown on the first statement of adjustments was never remitted to Revenue Canada.
There is certainly a place for legitimate tax planning. However there is a difference between tax planning and fiscal shenanigans. These transactions fall into the latter category. To his credit Mr. Webster was quite open about the purpose of the purported transactions and he did not try to portray them as being anything other than what they were. They were classic shams, pure and simple (Snook v. London & W. Riding Invest. Ltd., [1967] 1 All E.R. 518 at 528). Indeed their only redeeming feature is that they were so obvious and were executed with such lack of finesse that no one could possibly have been taken in by them.
[5] In the reply to the notice of appeal it is stated that other adjustments were made to the GST/HST collectible and the input tax credits allowed. Apart from the challenge to the tax imposed on the rental of 25 Derrick Court, no other objection is taken to the amounts assessed. However in the reply it is admitted that the assessment contains an error in the amount of net tax assessed of $57,092.90. The correct amount should be $39,732.90.
[6] The appeal is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment to give effect to the admission contained in paragraph 4 of the reply to the notice of appeal.
[7] There will be no order for costs.
Signed at Ottawa, Canada, this 14th day of September 2000.
"D.G.H. Bowman"
A.C.J.