Date: 19990719
Docket: 98-1693-GST-I
BETWEEN:
ATLANTIC MINI & MODULAR HOMES (TRURO) LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Brulé, J.T.C.C.
[1] The Appellant is appealing a Notice of Assessment issued by the Minister of National Revenue (the "Minister") for the period from August 9, 1991 to June 30, 1996.
Facts
[2] The Appellant is a Goods and Services Tax (GST) registrant. Mr. Ray Thibault, owner and sole shareholder of the Appellant, testified on behalf of the Appellant. The Appellant is in the business of selling new and used mobile, mini and modular homes. Mr. Thibault was an employee of East Coast Housing Ltd., which was also in the business of selling mobile, mini and modular homes. The latter was put into receivership by the National Bank of Canada (hereinafter, the "Bank") in August of 1991. Mr. Thibault incorporated the Appellant and began business.
[3] The Appellant entered into an agreement with the Bank in which it is provided that the Appellant will provide repair and maintenance on housing units repossessed by the Bank. It is also provided in the agreement that the Appellant will act as a non-exclusive commissioned sales agent on behalf of the Bank for the units repossessed from East Coast Housing Ltd. The Appellant would receive in return a commission of 30%. The agreement was signed on September 10, 1992 and expired at the end of August 1993. During the term of the agreement, the Appellant would submit solicited offers to purchase housing units to the Bank for its approval. If the Bank accepted the offers, payments are made to the Bank who would in turn pay commission to the Appellant.
[4] Upon the expiration of the agreement, payments were made to the Appellant. Mr. Thibault testified that after August 31, 1993, the Appellant made offers to purchase the mobile homes to the Bank. However, no bill of sale was ever signed between the Bank and the Appellant. Instead of receiving commissions, Mr. Thibault explained that the Appellant sold the homes at a price it so decided and the difference between the sale price and the price it purchased it for would be the profits. These profits varied.
[5] Mr. Thibault also testified that the time frame varies between the purchase of the mobile homes from the Bank and the actual sale of them to a purchaser. If the purchaser ever experienced problems with the mobile home, he or she would go see the Appellant. Nevertheless, there was no warranty on these homes.
[6] Mr. Thibault said that the purchase price of the homes from the Bank represented the cost to the Appellant. The Appellant would try to resell the homes at a higher price. The Appellant has a blanket insurance coverage on its inventory. This insurance would cover all the units it owns, but no specific insurance was bought for each unit.
[7] During the reassessment period, the sales of the housing units amount to $114,478.55. The Appellant received sums from the Bank which the Minister characterized as commissions. The Minister is of the opinion that the used mobile homes sold by the Appellant are residential complex within the meaning of the Excise Tax Act (the "Act") and it follows that GST should be remitted on the taxable supplies provided by the Appellant. However, the Appellant did not report the commissions earned nor did it remit any GST on them.
Issues:
[8] Was the Appellant making a taxable supply or was the Appellant a buyer of supplies in the view of reselling them, in which case it made an exempt supply?
The Appellant's position
[9] The Appellant argues that the sums received for the sale of mobile homes from the Bank are not commissions. Rather, these are sums from proceeds of resale. Its position is that it is the owner of the mobile homes and that upon the sale of these to purchasers, no GST can be levied since these are exempt supplies. Furthermore, counsel for the Appellant argues that a bill of sale is not necessary because it only establishes the title against a third party. As it appears from Exhibit A-1, correspondence between the Appellant and the Bank usually states the price of the mobile home and outlines a reason why the Bank should accept the price.
[10] The Appellant concedes that prior to August 31, 1993, the Appellant was in fact an agent of the Bank. The sums received by the Appellant can clearly be charaterized as commissions because the rate of the commissions, 30 percent, was always the same. However, an agency relationship did not exist after the expiration of the agreement. The commission rates varied from 25 to 56 percent. Counsel for the Appellant suggested that no agency relationship exists and to find otherwise would be absurd.
The Respondent's position
[11] The Minister submits that no document exists evidencing a sale of mobile homes from the Bank to the Appellant. Counsel for the Respondent contends that in reality the Appellant would sell the homes on behalf of the Bank and then deduct a commission before paying the Bank. Counsel for the Respondent submits that the Appellant is an agent of the Bank. Referring to the fact that the mobile homes were never brought to the Appellant's trailer park where some of the Appellant's inventory homes are located, counsel for the Repsondent argues that this indicates that the Appellant never owned the homes.
Analysis
[12] Subsection 165(1) of the Excise Tax Act (R.S.C. 1985, c. E-15, as amended reads as follows:
"(1) Subject to this Part, every recipient of a taxable supply made in Canada shall pay to Her Majesty in right of Canada a tax in respect of the supply calculated at the rate of 7% on the value of the consideration for the supply."
[13] Subsection 123(1) of the Act defines "taxable supply" as:
"...a supply that is made in the course of a commercial activity."
The same provision also defines the phrase "commercial activity":
"(a) a business carried on by the person (other than a business carried on by an individual or a partnership, all of the members of which are individuals, without a reasonable expectation of profit), except to the extent to which the business involves the making of exempt supplies by the person,
(b) an adventure or concern of the person in the nature of trade (other than an adventure or concern engaged in by an individual or a partnership, all of the members of which are individuals, without a reasonable expectation of profit), except to the extent to which the adventure or concern involves the making of exempt supplies by the person, and
(c) the making of a supply (other than an exempt supply) by the person of real property of the person, including anything done by the person in the course of or in connection with the making of the supply."
[14] The definition of "commercial activity" was amended during the relevant period, but this amendment does not affect the case at bar.
[15] Therefore if the supplier is engaged in the making of an exempt supply, no GST is payable on the supply. An exempt supply is provided under Schedule V of the Act. Section 2 of Schedule V reads as follows during the material times:
"2. A supply by way of sale of a residential complex or an interest therein made by a person who is not a builder of the complex or, where the complex is a multiple unit residential complex, an addition thereto, unless the person claimed an input tax credit in respect of the last acquisition by the person of the complex, or in respect of the acquisition or importation by the person, after the complex was last acquired by the person, of an improvement to the complex."
[16] A "residential complex" includes a mobile home as defined under subsection 123(1) of the Act which says:
"...
(d) a mobile home, together with any appurtenances to the home and, where the home is affixed to land (other than a site in a residential trailer park) for the purpose of its use and enjoyment as a place of residence for individuals, the land subjacent or immediately contiguous to the home that is attributable to the home and is reasonably necessary for that purpose,
..."
It follows that mobile homes are exempt supplies to the extent that they are affixed to the land:
"If the mobile home is not affixed to land, it is deemed pursuant to subsection 142(3) of the Act to be a personal property and not real property."
[17] The Appellant claims that it was selling mobile homes and the difference between the acquisition price from the Bank and the sale price constitutes the profit it made. No GST should therefore be levied. The Appellant argues that this difference is not a commission but the mark-up of the price. The Minister, on the other hand, contends that the Appellant was an agent of the Bank. It further submits that the Appellant cannot be afforded the exception of section 177 of the Act which provides that, in an agency relationship, the principal will pay GST on the agent's commissions. This provision is not applicable in the case at bar because the Appellant is making an exempt supply.
[18] In the Court's opinion, the only remaining question is whether the Appellant was making an exempt supply (i.e. the resale of used mobile homes) or a taxable supply (i.e. the service of selling mobile homes on behalf of the Bank).
[19] Counsel for the Respondent makes the argument that the Appellant was providing a taxable supply to the Bank in his capacity as agent. As the Appellant cannot bring himself within the agency exception of section 177 of the Act, he will be liable for tax if it is found to be providing a taxable supply. Professor G.H.L. Fridman, in his book The Law of Agency 6th ed. (Markham, Butterworths, 1990) at page 9, defined an agency relationship as:
"Agency is the relationship that exists between two persons when one, called the agent, is considered in law to represent the other, called the "principal" in such a way as to be able to affect the principal's legal position in respect of strangers to the relationship by the making of contracts or the disposition of property."
[20] The Minister in a draft policy (P-182) has considered the issue of agency in which he identified three essential characteristics in an agency relationship, more or less identical to the ones established by Professor Fridman. These are the consent of both the principal and agent, the authority of the agent to affect the principal's legal position and the principal's control of the agent's action. In the same policy, it is further stated:
"A person who sets the resale price of a property is likely a buyer who resupplies. Generally, a resale price will include a mark-up on property or services acquired from a third party and supplied to another person. In other words, the earning of the person who is not an agent flow from his ability to sell the property or service at a price greater than that which it cost him to acquire rather than from the usually separate remuneration for his agency services."
[21] In the case at bar, agency may be indicative of a relationship in which the Appellant has provided the Bank with a taxable supply. However, this is only one of many factors to be considered in determining whether the Appellant made a taxable supply. It is interesting to note that no one from the Bank was called to give evidence.
[22] An agency relationship did exist from September 10, 1992 to August 30, 1993. This is evidenced by an agreement signed by the Appellant and the Bank in which it provided that the Appellant "shall act as a non-exclusive agent to the receiver". This agreement also provided that a commission of 30% would be paid to the Appellant for the mobile homes sold. At the expiration of the agreement, no other document was signed establishing an agency relationship between the Appellant and the Bank.
[23] In the case at bar, I do not see any conduct by the Appellant or the Bank that would equate to an agency. Conversely, it appears from the correspondence between the Bank and the Appellant that the latter did in fact make offers to the Bank with respect to each mobile home unit. For example, a memorandum from the Appellant to the Bank offers the price of $2,800 for the mobile home unit TN-28. A sales agreement was signed by the Appellant as the vendor and by the purchaser of the mobile home unit TN-28 for the amount of $5,499.21. The fact that the Appellant had already found a third party to purchase the mobile home does not in itself establish an agency. In the Court's opinion, this is commercially prudent behaviour. Clearly, from the evidence adduced, the Court must conclude that the Appellant had purchased the mobile home units and resold them to the purchasers.
[24] Draft policy P-182 addressed the situation of a supplier acquiring property for resale. In the excerpt reproduced above, the Minister was of the view that a supplier who acquires a property to resell it at a higher price is unlikely to be an agent. The Court agrees with this view. An agent would usually receive remuneration in some predetermined form, such as a fixed commission rate as it was under the agreement signed on September 10, 1992. However, after the expiration of the agreement, no predetermined form of remuneration is established. The sale price of the mobile homes is entirely dependent on the Appellant's ability to mark-up the price.
[25] Lastly, counsel for the Respondent's entire argument rests on the lack of documents evidencing the transfer of ownership of the mobile homes from the Bank to the Appellant. Section 286 of the Act imposes a statutory duty to keep books and records. However, the Court does not think that the lack of documents is fatal. The determination of whether a person has failed to keep adequate records and books is a question of fact: see Helsi Construction Management Inc. v. The Queen, 98 GTC 2004. Moreover, the documents produced to the Court are clearly adequate. At the very least, some documents are produced to the Court in which the Appellant made offers to the Bank to purchase the mobile homes. These documents are supported by Mr. Thibault's testimony. Also, as stated by Mr. Thibault, the time between the purchase of the mobile homes from the Bank and the resale of these is usually quite short.
[26] The Court concludes that the Appellant did not make a taxable supply within the meanintg of the Act during the period of August 31, 1992 to June 30, 1996. The Appellant was a buyer who resold the used mobile homes. Since these are exempt supplies, no GST is levied. Prior to this period, both parties contend that the Appellant was an agent of the Bank and therefore, GST should be paid on the commissions received. Consequently, the appeal is allowed and the matter is referred back to the Minister for reconsideration and reassessment according to the above reasons.
Signed at Ottawa, Canada, this 19th day of July 1999.
"J.A. Brulé"
J.T.C.C.