Tax Court of Canada Judgments

Date: 20001220

Docket: 2000-971-GST-I

BETWEEN:

JASWANT CHEEMA,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

McArthur, J.

[1]            The Appellant purchased land and built a side-by-side duplex on McArthur Drive in Kamloops, British Columbia. He sold it within one year without collecting goods and services tax (GST) on the sale taking the position that it was the conveyance of a personal residence. The Minister of National Revenue (Minister) assessed the Appellant for failing to collect and remit GST of $14,392 together with interest and penalty. The Minister also denied the New Housing Rebate. The Appellant argued that he and his brother Parmjit lived in the duplex but moved because Parmjit was transferred from Kamloops to Surrey. The primary question is whether the activity was a venture in the nature of trade.

[2]            It is common for small builders to build a home, move in for a short time, and sell it. The builder believes he has escaped tax.[1] A builder who is in the business of building and selling is taxable for any profit under the Income Tax Act. As explained by the Minister's auditor, Revenue Canada has been searching for such builders. Builders who carry on this practice are now also subject to subsection 191(1) of the Excise Tax Act, the GST self-supply rule. Under subsection 191(1) when a builder constructs a home and moves in, he must pay GST on the fair market value of the home. Someone who builds only for personal occupancy and not as a business or venture in the nature of trade, is not a "builder" as defined in subsection 123(1) and thus, not subject to the self-supply rule.[2] Subsection 191(5) offers a builder an exception to the self-supply rule if the builder uses the complex primarily as a residence and no input tax credits were claimed.

[3]            The Appellant's first witness was his brother, Parmjit, who is a corporal in the RCMP His family had emigrated from India to Delta, BC in the early 1970s where the Appellant's father was a roofer amongst other trades. Parmjit joined the RCMP and was posted to the Kamloops, BC detachment in 1990. He purchased a home on Bossert Avenue in Kamloops where he resided until 1993. He and his wife and one child moved into Courtney Crescent in June 1993 where, with the Appellant and his father, he had constructed a single family home on a vacant lot. The Appellant had moved to Kamloops leaving his wife and children in Delta. The Appellant was looking for work but found nothing permanent during his year in Kamloops. He lived with Parmjit. In January 1994 Parmjit sold his Courtney residence and moved into a home on Partridge Drive. This single family dwelling was built by the Appellant, Parmjit and their father. In the meantime, the Appellant purchased a lot on McArthur Drive in Kamloops upon which the two brothers built a duplex, a side-by-side single family home joined by a common wall which was substantially completed in May 1994 and described municipally as 754 and 756 McArthur Drive.

[4]            I find as a fact that Parmjit and his family moved into 756 McArthur Drive with the intention of residing there as their principal place of residence. I also find as a fact that the Appellant did not reside in 754 McArthur Drive as his principal place of residence. My finding of facts are based on the following:

i)               With respect to 756 McArthur Drive:

                I believe Parmjit's evidence that he carefully investigated the area with respect to schools, tranquillity and other aspects including that it was upwind from the paper mill smells and intended to permanently reside in 756 McArthur Drive.

ii)              I believe the evidence of his wife which confirmed their intention to permanently reside in 756. Shortly before moving to 756, she had a second child.

iii)             The Appellant executed a declaration of trust[3] on April 1, 1994 declaring he held 756 McArthur Drive in trust for Parmjit. The two brothers were very close and as a matter of convenience left title in the Appellant's name. I accept that the Appellant was the beneficial owner of 754 and Parmjit the beneficial owner of 756.

[5]            The Appellant's memory of the events and grasp of details was limited. An auditor for Revenue Canada, Ms. Panas, was impressive and gave comprehensive evidence. She gathered a mountain of detail after careful research. This cast a serious suspicion on the credibility of the Appellant.

[6]            The Minister's auditor explained that Revenue Canada has sought out builders who attempt to use the pretense of a principal residence to avoid payment of GST. The Minister assesses builders pursuant to subsection 191(1), the self-supply rule, which provides that if a builder constructs a new home with the intention of selling it for profit and before selling it, moves in, the builder must remit GST on the value of the new home. A taxpayer who builds for personal occupancy and not as a business or venture in the nature of trade, is not a builder as defined in subsection 123(1) and is not subject to the self-supply rule.

[7]            In this case, we have one Appellant yet two owners of the duplex and two different sets of circumstances. The Appellant in early 1993, was married with children and living in Delta where he had resided since childhood. He worked as a labourer and had bought and sold dwellings in Delta. In early 1993, he moved to Kamloops, lived with Parmjit and looked for work. He found nothing permanent. His evidence was sketchy and lacked lucidity. He assisted his father and brother in the construction of a home on Partridge Drive and Courtney Crescent in Kamloops. The Courtney residence was registered in the name of Parmjit. The Partridge residence was registered in the father's name.

[8]            In January 31, 1994, he purchased lots 9 and 10 on McArthur Drive upon which the duplex was constructed. The brothers blended their funds. The evidence was confusing with respect to who paid for what. The vacant lots cost a total of $59,900 and were registered in the Appellant's name alone. Together the brothers acted as general contractors in the construction.

[9]            There were two building permits issued to the Appellant in February 1994, one for the construction of a semi-detached dwelling unit on lot 9 being 756 McArthur Drive and the second building permit for the construction of a semi-detached residential unit on lot 10 being 754 McArthur Drive. I accept the unchallenged evidence that each unit could be sold separately and that the Appellant was the beneficial owner of 754 and Parmjit the beneficial owner of 756.

[10]          The Appellant and his father did not have employment in 1993 and 1994 outside of building the dwellings on Courtney, Partridge and McArthur. Some of the receipts for materials purchased for McArthur were made out to Cheema Construction. The Appellant explained that this name was used to get better prices from suppliers and he did not operate a construction company. The Appellant was familiar with construction and had built houses previously. He spent over a year in Kamloops yet did not move his wife and children from Delta. He did not have outside employment. He declared a taxable income in 1992 under $5,000 yet had the funds, together with Parmjit to buy lots 9 and 10 and construct a duplex without third-party financing. He moved little or no furniture into 754.

[11]          The first question is whether the Appellant was in the business of building houses as in a venture of concern in the nature of trade. I will apply the often-referred-to tests of Rouleau J. in Happy Valley Farms Ltd. v. The Queen.[4]

1.              Nature of property sold. In each case the Appellant purchased a lot, built a dwelling, moved in briefly, if at all, and sold it.

2.              Length of period of ownership. All three transactions occurred in less than 18 months.

3.              Frequency of transactions. The Appellant built three dwellings in 1993 and 1994.

4.              Work expended on the property. The Appellant, his brother and father did all the general contracting.

5.              Circumstances responsible for sale. The Appellant did not have to move because his brother was transferred. He returned to his Delta home to join his wife and family.

6.              Motive. I do not accept that he built 754 to live in.

[12]          The evidence leads to the conclusion that the purpose of the McArthur Drive transaction and the previous ones, was to make a profit. Building houses was his business. I find as a fact that 754 was constructed by the Appellant for the purpose of selling it for a profit. The Appellant was correctly assessed on the basis that he was a builder who received a self-supply pursuant to subsection 191(1).

[13]          In conclusion, I find that the Appellant was the builder of 754, and constructed it with his brother and father, with the primary intention of selling it at a profit in the course of a venture in trade. He did not occupy it as a primary place of residence and was required to collect GST equal to 50% of $14,392.52 assessed for the whole.[5] He did not file a New Housing Rebate application for GST within the time prescribed in the Act or any other time for that matter. In any event, he is not entitled to a New Housing Rebate. The Appellant's appeal with respect to 754 is dismissed. Parmjit is not the Appellant and has no status in this appeal to claim a New Housing Rebate and it would appear that he is beyond the strict time limits provided in the Act.

[14]          It is understandable that the Minister assessed the Appellant as he did. What do we have? A semi-detached residential building constructed by the Appellant, Parmjit and father. The Appellant was the owner of 754 and his brother 756. The Appellant was in the business of building in Kamloops. The entire semi-detached building was constructed without third-party financing. The Appellant's primary, if not only, source of income was from the construction of houses. Parmjit was a full-time police officer with the RCMP but his primary source of funds to construct 756 must have come from profits upon the sale of (i) Bossert Avenue in April 1993, (ii) Courtney Crescent in December 1993 and (iii) Partridge Drive in April 1994.

[15]          While it is close to the line, I accept that 756 was constructed as Parmjit's principal place of residence and sold, together with 754, only because Parmjit was transferred unexpectedly to Surrey. Parmjit built and owned 756. I find that 754 and 756 were of equal value.

[16]          The appeal is allowed on the basis that the Appellant is not liable for GST on 756 McArthur Drive but is liable for GST on 754 McArthur Drive in the amount of $7,196.26 together with interest and penalties. Interest and penalties to be assessed proportionately to the reduced assessment.

Signed at Ottawa, Canada, this 20th day of December, 2000.

J.T.C.C.

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