Tax Court of Canada Judgments

Date: 20010123

Docket: 1999-5065-GST-I

BETWEEN:

WARREN ERICKSON,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Hershfield J.

Facts

[1]            The Appellant constructed an addition to his home during the spring and summer of 1997. Upon completion of the work he filed a GST new housing application for rebate of goods and services tax. The rebate application was received by the Minister of National Revenue ("Minister") on November 30, 1998 and by Notice of Assessment dated April 12, 1999 the Minister disallowed the Appellant's application for the rebate. The Appellant objected to the Notice of Assessment on June 25, 1999 and the Minister confirmed the assessment by Notice of Decision dated September 27, 1999. The Appellant has now filed a Notice of Appeal from such Notice of Decision.

[2]            The Respondent admits that the Appellant built an addition onto his house. I accept the evidence of the Appellant that the cost of the addition was $45,523.00, which amount included not only the cost of the addition per se but the cost of changes to the original residence to which the addition was added. If the rebate applies it would be calculated against this cost amount which I accept as representing expenditures on taxable supplies in respect of which GST was paid. At the trial the Respondent did not take issue with this. The issue then is whether or not the requirements of subsection 256(2) of the Excise Tax Act would, on its terms, entitle the Appellant to a rebate. That subsection sets out requirements to be met in order to qualify for the rebate. In this case the qualifications have been met excepting, possibly, the qualification set out in paragraph 256(2)(a) which is in issue. The rebate qualification in that paragraph will be met:

256(2) Where

(a) a particular individual constructs or substantially renovates, or engages another person to construct or substantially renovate for the particular individual, a residential complex that is a single unit residential complex or a residential condominium unit for use as the primary place of residence of the particular individual or a relation of the particular individual. (emphasis added)

[3]            A “substantial renovation” is defined in subsection 123(1) as follows:

"substantial renovation" of a residential complex means the renovation or alteration of a building to such an extent that all or substantially all of the building that existed immediately before the renovation or alteration was begun, other than the foundation, external walls, interior supporting walls, floors, roof and staircases, has been removed or replaced where, after completion of the renovation or alteration, the building is, or forms part of, a residential complex.

The Appellant has conceded that he did not “substantially renovate” the single unit residential complex that was his original home and does not appeal on that ground.[1]

[4]            A “residential complex” is defined in subsection 123(3) as that part of a building in which one or more “residential units” are located. A “residential unit” is defined in that subsection as:

"residential unit" means

(a) a detached house, semi-detached house, rowhouse unit, condominium unit, mobile home, floating home or apartment,

(b) a suite or room in a hotel, a motel, an inn, a boarding house or a lodging house or in a residence for students, seniors, individuals with a disability or other individuals, or

(c) any other similar premises,

or that part thereof that

(d) is occupied by an individual as a place of residence or lodging,

(e) is supplied by way of lease, licence or similar arrangement for the occupancy thereof as a place of residence or lodging for individuals,

(f) is vacant, but was last occupied or supplied as a place of residence or lodging for individuals, or

(g) has never been used or occupied for any purpose, but is intended to be used as a place of residence or lodging for individuals.

The Appellant has conceded that the addition by itself is not a residential unit which means it is not a residential complex eligible for a rebate. The Appellant has acknowledged that he does not appeal on this ground.[2]

[5]            The Appellant’s ground for this appeal is that he has “constructed a” (new) “residential complex”. He argues that the renovated original residence and the addition constitute together a residential complex (that is a single unit residential complex) that did not exist before. In effect he argues that the new residence was neither the renovated original residence nor the renovated original residence with an addition.[3] He argues that the post renovation/addition product of his labour was a residential complex that did not exit before he did the new construction work and in respect of which he asserts he meets the paragraph 256(2)(a) requirements for a rebate. His authority for his position, that renovations to an existing residence (that are not themselves “substantial renovations” of the original residence) together with an addition to that residence can be treated as the construction of a new residential complex, is Policy Paper No. P-153 that sets out Revenue Canada’s administrative practices in respect of rebates in cases such as these. Before referring to this Policy Paper further, I will consider the actual work done in this case in respect of the subject addition and renovations.

[6]            To assist the Court in understanding the extent of the renovation the Appellant brought numerous pictures and various building and engineering plans. These were entered as exhibits but I do not think there is a need to refer to them further except to acknowledge that they confirm that the work done in this case was extensive and brought about a material change to both the exterior and interior of the original residence both in appearance and function. It might well be said that the character of the home as a whole changed after the work was completed.

[7]            In general the project can be described as follows: the home before the addition was constructed had a floor space square footage of 1,040. The addition added another 960 square feet. As well, the addition added a two-car attached garage. The home increased in living space by 92.3% excluding the garage. The addition is a lateral addition to a bungalow where the additional living space was added above the new two-car garage. The addition is higher and deeper than the original house. The addition has a total of four rooms, a hallway and four closets. There are two 12' x 12' bedrooms with 3' x 5' closets and a recreation room that is 24' x 18'. These are on the second floor above the newly added two-car garage. Also, part of the lateral addition is a main floor addition that accommodated the joining of the addition with the original residence. That main floor addition consists of a 6' x 33' hallway with a 6' x 6' laundry room and a stairway to the second floor. There is a closet under the stairs as well as a 6' x 2' closet at the new entrance way to the home. The hallway includes the new front entrance and has a vaulted ceiling. The side of the original home to which the addition was added obviously had to be opened to provide access to the addition.

[8]            The Appellant testified that the original front door, located in the front centre of the original house, was removed and closed in. Half walls that existed beside the entrance were removed. Carpeting was added at the old entrance way. The entrance way from the dining room to the living room was modified to accommodate changes in traffic flow due to the change in the location of the front door. The wall and doorway were removed from the back bedroom. Modifications had to be done on the kitchen fan ducting to re-route the exhaust outlet. At the side of the house where the addition was added a double doorway was added to tie the existing house into the addition. All the stucco on the side of the existing house where the addition was added had to be removed and buffalo board and insulation on that side of the house was also removed. Access holes were punched into the concrete foundation of the original house to provide access to the addition for electrical, plumbing, heating, central vacuum, cable television and telephone systems. The steps in front of the old front entrance to the original house were removed. There had to be landscaping modifications as well to accommodate the change in the entrance way and the new addition. The design of the addition was to incorporate a matching roofline so that existing roof angles could be maintained. This required exterior roofing modifications including extending the roofline and the eavestroughs and relocating exterior electrical outlets. New siding was installed on the front of the original house to match or coordinate with the new siding of the addition.

[9]            To accommodate the new addition several new systems were installed as well as extensions to existing systems. A new gas heating system was installed along with the gas line and chimney. This is an additional heating system so that the addition has an independent heating source. New electrical work had to be added. A new electrical sub-panel provided 8–15 amp circuits to the new addition. An extension of the plumbing was installed into the new addition to supply the laundry room with hot and cold water and drainage for the washing machine. Telephone jacks, cable outlets and central vacuum were added or extended to the addition.

[10]          As stated above the cost of the addition including all the foregoing work was $45,523.00. The cost of the original residence when the Appellant acquired it in 1992 was $86,000. The construction was done by the Appellant together with a contractor and sub-trades engaged by himself or the contractor.

[11]          As stated above the Appellant’s position in this appeal is that he has constructed a new residential complex. To support his position he cites Revenue’s own Policy Paper and asserts that his case falls within the spirit of that Policy Paper if not the actual principles prescribed therein. That Policy Paper starts out as follows:

This policy statement addresses the issue of determining whether the construction of a major addition to an existing single unit residential complex (where the addition does not comprise a separate building and is not part of a substantial renovation of the existing residential complex) is the construction of a single unit residential complex for various purposes of the Excise Tax Act.

[12]          In determining whether the construction of an addition to a particular single unit residential complex is of such a substantial nature that it may be considered to be the construction of a new single unit residential complex, the Policy Paper goes on as follows;

In order for the construction of a major addition to be considered the construction of a single unit residential complex, the major addition should fundamentally change the character of the previous complex to such an extent that one would view the original complex to have been reconstructed such that either the original single unit residential complex and the addition together essentially form a newly constructed residential complex or where the existing single unit residential complex was incorporated into the major addition so as to essentially form a newly constructed residential complex. This would not normally be the case where the existing single unit residential complex remained virtually intact and the addition does not at least equal the size of the existing house before the construction of the addition (for example, the construction of enclosed rooms over the roof of an attached garage). Such may be the case, however, for example, where a person adds a full second storey to an existing bungalow. Where the major addition is constructed as a extension to the existing house, the addition may qualify as the construction of a residential complex where both the existing house and the addition can essentially be viewed as a newly constructed residential complex or the existing house has been incorporated into the addition so as to essentially form a newly constructed residential complex

The construction of a porch, sunroom, family room, bedroom over the construction of more than one room is not normally considered to be the construction of a single unit residential complex. The addition to an existing single unit residential complex must be of such a major proportion that the size and function of the addition would more properly be described as a newly constructed residential complex than merely the construction of an addition to the existing house.

Some of the factors that may be considered in determining whether the construction of a major addition is the construction of a residential complex are the ratio of newly constructed floor space to the existing floor space, the relative size of the new construction, the number and type of rooms of the new construction, the degree of annexation of the existing complex into the new construction, the type of changes that had to be made to both the exterior and interior of the building to accommodate the addition, the overall cost of the addition, the presence of new mechanical (e.g. plumbing and electrical) systems, etc. All of these factors may be examined to assist the Department in determining whether a person has constructed an addition that amounts to the construction of a single residential complex.

[13]          The Respondent submits that the Appellant did not construct a residential complex as that term is defined in subsection 123(1) of the Excise Tax Act, but rather renovated a pre-existing residential complex. The Respondent would then maintain, as admitted by the Appellant, that the renovation of the pre-existing complex did not meet the "substantially renovate" requirement in paragraph 256(2)(a), and on that basis the Respondent asserts that the appeal must fail. Counsel for the Respondent argued that the Respondent’s position was not intended to be inconsistent with her client’s administrative practise as set out above. The Respondent’s position was that the addition to and the renovations to the original residence were not sufficient to meet the requirements of the Policy Paper. The addition did not at least double the square footage of the original residence and/or the character of the original residence had not changed (or if it had changed it had not changed sufficiently to give rise to the creation of a new home as opposed to the creation of a modified, pre-existing home). The addition was an annex to the original home. Counsel for the Respondent acknowledged that even if I found that the character of the Appellant’s residence had changed at least as much as seemed to be required by the second storey addition example used in the Policy Paper and that if, on that basis, I found her client was not applying its own administrative practise in a consistent and fair manner, my responsibility was to consider the merits of the appeal as governed by the Act even if such consideration tended to undermine the administrative practises set out in the Policy Paper. That is, regrettably perhaps, the Minister seeks to have its assessment confirmed even at the risk of having its own administrative practises, established by it in good faith as a proper construction of the rebate provisions of the Act, condemned.

[14]          In supporting its submission that the Appellant did not construct a residential complex (a new residential complex), the Respondent argues that an addition can only be a newly constructed residential complex if the pre-existing unit is incorporated into an addition that is of such size and proportion that negates its being seen as merely an addition to the existing house. The addition should be of such proportion that would make the pre-existing unit, in effect, the "add on". I agree with this position. The test then, as I would put it, is whether the pre-existing residence has been incorporated into a new residence or whether an addition has been incorporated into a pre-existing residence. The former (but not the latter) may qualify as the construction of a (new) residential complex. I believe this expression of the test, of when a housing construction project can properly be viewed as one that constructs a new complex versus one that renovates an existing complex by adding to it, is in line with the requirements of the Act in respect of identifying construction that is eligible for the new housing rebate. To this point there is no difference between the Respondent’s argument and her client’s stated administrative practise. That is, where the original residence is incorporated into the addition as an "annex", a wing or relatively minor part of the newly constructed residence, the Respondent would treat the addition and renovations to the original residence together as a construction of a new residential complex. However, the Policy Paper also suggests by specific example that by adding a second floor to a bungalow where the second floor at least doubles the square footage of the original residence, the character of the residence may have sufficiently changed to regard the construction as the construction of a new residential complex. The Appellant argues that his lateral addition has similarly changed the character of his original residence, and I would agree. I do not agree, however, that an addition, whether one constructs upward or sideways, that simply doubles the square footage of a home, constitutes construction that is sufficient to create a new residential complex even if the character of the home is thereby changed. Changing the character of a home is not only an imprecise and subjective criterion, it is one that the Act does not invite as a factor in permitting a rebate. To say that changing a bungalow to a two-storey home may change the character of the former residence is not sufficient. The character of a home can be easily changed by a variety of renovations. Changing roof lines, enlarging and adding windows or redoing the exterior finishing of a home from, say, stucco to brick and stone could well change the character of a home. However, such changes would not justify a finding that a new residential complex has come into being. Similarly living space modifications can change the character of a home in terms of the way it functions but again such change in character may not be sufficient to support a finding that such modifications have transformed a pre-existing structure into a new residential complex.

[15]          Consider that paragraph 256(2)(a) makes no reference to additions. From this it has been found that "additions" per se do not qualify for rebates.[4] Consider also that the Federal Court of Appeal in Syned has said that the GST rebate provisions for new housing are a limited and carefully tailored exception to the application of GST to taxable services in relation to house building and house renovations. Since additions are not mentioned in the rebate provisions and since we are to regard the rebate provisions as being carefully crafted exceptions in the application of GST, I must conclude that an addition will not give rise to rebates unless it incorporates (consumes) a pre-existing premises to the point where the addition is essentially the new residential premises and the pre-existing premises, having ceased to exist as a residential unit is essentially reduced to a relatively minor aspect of that new premises. If renovations which are expressly provided for under the Act must be so substantial as to require virtually gutting all of a pre-existing premises to qualify for a rebate, additions, for which there are no express provisions in the Act, should (if they are to be considered at all) presumably be more substantial yet. An addition that doubles square footage by adding a few rooms in any direction will not qualify for a rebate applying these criterion, even if the character of the residence has been modified in the process[5].

[16]          The Appellant I think rightfully feels that his addition is indistinguishable from the bungalow being converted to a two-story home example given in the Policy Paper and asks me to enforce the Policy Paper or the spirit of it so as to allow his appeal. This I cannot do. Adding a double garage and doubling your living space in a home does not constitute anything more than a significant renovation. The Act does not permit a rebate on a renovation, significant or otherwise, unless virtually all of the existing premises is gutted. Making a home bigger, even significantly bigger, is simply not contemplated by the legislation as qualifying for a refund, in my view. As stated above there might be cases where an addition is of such proportion in relation to the existing premises that it can fairly be said that the existing premises has been incorporated into the addition in a manner that makes it appropriate to regard the original premises as effectively having ceased to exist as a residential unit. In such case, a new premises has been constructed and the rebate provision will apply. That is not the case here. The original premises is largely intact and constitutes a significant part of the post construction premises. It continues to have all the components of a residential unit. The addition just enhances that unit.

[17]          Based on the foregoing I find that the Appellant in this case cannot be successful in his appeal. Accordingly the appeal is dismissed, without costs.

Signed at Ottawa, Canada, this 23rd day of January 2001.

"J.E. Hershfield"

J.T.C.C.

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