2000-4613(GST)I
BETWEEN:
POLYGON SOUTHAMPTON DEVELOPMENT LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on November 20, 2001 at Vancouver, British Columbia, by
the Honourable Judge Campbell J. Miller
Appearances
Counsel for the Appellant: Carl E. Beck
Counsel for the Respondent: Lynn M. Burch
JUDGMENT
The appeal from the assessment made under the Excise Tax Act, notice of which is dated July 10, 2000 and bears number 117011304, is allowed, without costs, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 4th day of February, 2002.
|
"Campbell J. Miller" |
J.T.C.C.
Date: 20020204
Docket: 2000-4613(GST)G
BETWEEN:
POLYGON SOUTHAMPTON DEVELOPMENT LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Miller, J.T.C.C.
ISSUES:
[1] The issues to be determined in this appeal are:
1. Is Polygon Southampton Development Ltd. ("Polygon") obliged to self assess in respect of the supplies of real property pursuant to subparagraph 191 (1)(b)(ii) of the Act?
2. If Polygon is not required to self assess is the Purchase Price for each strata lot lease deemed to be Goods and Services Tax ("GST")-included pursuant to section 194 of the Act?
3. If the Purchase Price for each strata lot is deemed to be GST-included pursuant to section 194 of the Act, is the New Housing Rebate ("NHR") calculated on the whole Purchase Price for each strata lot lease pursuant to section 254 of the Act?, If Polygon is required to self-assess, is the NHR to be calculated on the whole Purchase Price or on only on the building value of the units further to section 254.1(2)(h) of the Act?
4. Is Polygon entitled to any NHRs in excess of the amounts it has already paid or credited to Purchasers?
[2] The following represent the facts agreed to by the Appellant and Respondent, upon which I rely:
AGREED STATEMENT OF FACTS AND DEFINITION OF ISSUES
1. This is an appeal in the case of the Appellant, Polygon Southampton Development Ltd., ("Polygon") from an assessment of Goods and Services Tax ("GST") dated July 10, 2000, in the amount of $183,670.25 in respect of dispositions of interests in townhouses situated in Vancouver.
...
4. Polygon is a corporation whose principal business at the relevant times was the development of new residential condominium units on lands legally described as Lot 1, District Lots 330, 2100 and 6320 Group 1, New Westminster District Plan LMP36920. The civic address of the development is: 3038 East Kent Avenue South, Vancouver, British Columbia, 3068, 3062, 3060, 3058, 3052, 3050, 3048, 3042 and 3040 East Kent Avenue South, 8598, 8592, 8586, 8580, 8574, 8568, 8562, 8556, 8550, 8515, 8521, 8527, 8533, 8539, 8577, 8583, 8589, 8595 and 8599 Aquitania Place, Vancouver, British Columbia.
5. Polygon is a "builder"for GST purposes.
6. Polygon was registered under Part IX of the Excise Tax Act (the "Act") effective February 7, 1995 and was assigned GST registration number 895219582RT.
...
8. In the period from January 1, 1996 to July 26, 2000 Polygon disposed of its interest in 78 new residential condominium units (the "Units").
9. The Units are residential condominium units as contemplated by the Excise Tax Act.
10. The Units were developed by Polygon on undeveloped land it had leased from the City of Vancouver, a public authority. The improvements made by Polygon were subject to the restrictions of Part 3 of the Condominium Act. Attached as Tab 1 is a copy of the original Ground Lease as between the City of Vancouver and Polygon.
11. The Ground Lease for the condominium development was converted by Polygon into individual strata lot leases as a result of the deposit by Polygon and with the consent of the City of Vancouver of a leasehold strata plan pursuant to Part 3 of the Condominium Act.
12. The basic rent under the Ground Lease provided is $3,705,555.00.
13. Article XXV of the Ground Lease provides for the conversion of the Ground Lease by Polygon into strata lots as soon as reasonably possible and for the registration of the Strata Lot Plan in accordance with the provisions of the Condominium Act and the Land Title Act. Each of the individual strata lot leases incorporates the terms of a Model Strata Lot Lease which runs for a period of 99 years.
14. Polygon constructed a residential development comprised of residential condominium units on the land in accordance with the Strata Lot Plan. The complete project comprised of 50 Units in one three storey apartment complex and 28 units in four three storey townhouse complexes for a total of 78 leasehold strata lots. Each Unit is a strata lot as defined in the Ground Lease and Model Strata Lease. Attached as Tab 2 is a copy of the Model Strata Lot Lease.
15. Article 2.01 of the Model Strata Lot Lease provides for the basic rent of the strata lot lease as follows:
"if the Basic Rent under the Ground Lease has not been paid, the Lessee covenants and agrees to prepay to the Lessor by the dates provided in the Ground Lease, as rent for and during the Term the Basic Rent for each of the Strata Lots as determined by dividing the unpaid basic rent under the Ground Lease by the total number of Strata Lots."
16. Section 15.02 of the Model Strata Lot Lease provides for the assignment, transfer or conveyance of Polygon's interest in the strata lots in a form attached thereto as "Terms of Instrument - Part 2 - Assignment".
17. The form providing for the assignment, transfer or conveyance of Polygon's interest in the strata lots, entitled "Terms of Instrument - Part 2 - Assignment" provides as follows:
a) In paragraph C, the land underlying the Ground Lease has been subdivided into strata lots by the deposit of a leasehold strata plan and the Registrar has issued in the name of the City, as registered owner in fee simple, new certificates to title to each of the strata lots shown upon the leasehold strata plan.
b) in paragraph D, the deposit of the leasehold strata plan converted the Ground Lease into individual leases in the name of Polygon in respect of the interest of the Polygon in each strata lot including its share in the common property;
c) in paragraph E, Polygon agrees to assign to each purchaser Polygon's interest in the particular strata in consideration of a sum to be paid by the purchaser (the "Purchase Price"). The Purchase Price under the contract is stated as a single amount and is not allocated between the buildings and land components of the strata lot.
...
19. Among others, the contract of purchase and sale has the following terms and conditions:
a) "The Purchaser acknowledges that this contract is for the purchase of an assignment of Polygon's interest in the balance of the term remaining in a pre-paid ninety-nine year strata lot lease of the individual leasehold stata [sic] lot containing the Home. The individual strata lot lease to be assigned to the Purchaser will be entered into by Polygon and the strata corporation following deposit in the Land Title Office of the leasehold strata plan. The form of individual strata lot lease is identified as the 'model strata lot lease' in the ground lease entered into between Polygon and the City of Vancouver (the "City") registered in the Land Title Office under number BL152744 (the "Ground Lease"). Additional particulars of the Ground Lease and the individual strata lot lease are described in paragraph 3 of Polygon's Disclosure Statement." (clause 5)
b) "The Home and all other items included in the Purchase and Sale will be and remain at the risk of Polygon until 12:01 a.m. on the Completion Date after which time they will be at the risk of the Purchaser." (clause 11)
c) The Purchase Price includes a refrigerator, range, dishwasher, hood fan, garburator, gas fireplace, blinds, washer and dryer. (clause 12)
d) The Purchase Price includes access to a designated parking stall. (clause 13)
e) The Purchaser acknowledges that this transaction is an 'exempt supply' under the Excise Tax Act and that there is no goods and services tax (GST) by the Purchaser in connection with the purchase of the Home. Accordingly, no portion of the Purchase Price of the Home includes any allowance whatsoever for and GST payable by the Purchaser in respect of the Home. Polygon will account for and pay all GST payable in connection with the development and construction of the Home. (clause 25).
20. The contracts of purchase and sale refer to receipt by Purchasers of Polygon's disclosure statement. A copy of Polygon's disclosure statement dated August 28, 1998 is at Tab 4.
21. By way of an Addendum to each contract of purchase and sale, the Purchaser agrees that if the Purchaser is eligible for a GST New Housing Rebate ("NHR"), then Polygon will grant a credit to the Purchaser towards the Purchase Price in an amount equal to the NHR. The Addendum is attached to the contract of purchase and sale. A representative sample of the Addendum is at Tab 5.
22. With respect to the development described above and for the purpose of calculating the amount of the NHR to be credited to Purchasers, in 1999 Polygon commenced an internal practice of allocating the Purchase Price between land and buildings. Although the contracts of purchase and sale do not identify any allocation of consideration as between land and buildings, Polygon has remitted GST based on an allocation of part of the Purchase Price such that the GST NHR is claimed on approximately 76% of the Purchase Price. Polygon calculated the cost of the land to be approximately 24% of the projected prices of the residential units based on the following formula:
[(price paid to City of Vancouver for long term lease) / (estimated total selling price of all units)]
23. Attached as Tab 6 is a representative sample of a vendor's statement of adjustments showing, among other things, the amount of the GST NHR credited by Polygon to the Purchaser.
24. Polygon and Purchasers would also enter into an Assignment Agreement wherein Polygon would assign to the Purchaser its interest in the strata lot together with an interest in the common property in proportion to the unit entitlement. The payment of the Purchase Price paid by the purchaser to Polygon was the consideration for Polygon to assign its interest in the strata lot to the purchaser" to hold unto the purchaser for all the residue now unexpired of the term of the lease subject to the payment to the City of the rent reserved in the Lease, to the performance and observance of the covenants on the part of the lessee to be performed and observed, and the conditions contained in the lease." A representative sample of the Form C and Assignment Agreement are attached as Tab 7.
25. In the period from January 1, 1996 to August 31, 1999 (the "Assessment Period") Polygon disposed of its interests in several Units in the development and self-assessed and reported as total GST collected or collectible in the amount of $497,066.31 and Polygon has remitted this GST, less the GST NHR which has been credited to various Purchasers.
26. During the Assessment Period, when the Appellant credited a purchaser an amount in respect of a GST NHR pursuant to section 254.1 of the Act, it claimed the amount as an Input Tax Credit ("ITC");
27. Of the 78 units Polygon disposed of its interest in during the Assessment Period, only 6 of those Units give rise to the amounts in dispute in this appeal.
28. Polygon has not credited various purchasers more the cumulative amount of $23,623.36 in GST NHRs with respect to the 6 Units at issue in this appeal.
29. Attached as Tab 8 is a copy of Polygon's completion schedule.
30. By Notice dated January 4, 2000 the Minister of National Revenue (the "Minister") assessed Polygon in the amount of $3,109 for the period from January 1, 1996 to August 31, 1999 as a result of the Minister's position that for the purposes of calculating the entitlement to the NHR pursuant to s. 254.1(2)(h) of the Act, the proper allocation to land was not 24% of the Purchase Price but was 32.5%. The Notice of Reassessment is at Tab 9.
31. Polygon objected to the assessment by notice dated March 31, 2000. A copy of the objection is attached at Tab 10.
32. The Minister reviewed Polygon's Notice of Objection and agreed that Polygon's original GST NHR claim based on the allocation of approximately 24% to land and 76% to buildings, was correct. The Minister disagreed with Polygon's other grounds of objection which included:
a) no GST was payable as Polygon was not obliged to self-assess (which issue represents $64,889 of GST paid in error);
b) alternatively, the NHR should be calculated on 100% of the Purchase Price pursuant to section 254.(2) of the Act (which issue represents $6,974.48 of GST NHR); and
c) in the further alternative, the NHR should be calculated on 100% of the Purchase Price pursuant to section 254.1 of the Act (which issue represents $6,974.48 of GST NHR).
33. The Minister issued Notice of Decision number 117011304 on July 10, 2000 allowing the objection with respect to the 24% allocation to land only. A copy of the Notice is attached at Tab 11.
APPELLANT'S POSITION:
[3] The Appellant concentrated his argument primarily on the requirement of Polygon to self-assess, as required by subsection 191(1) of the Excise Tax Act ("Act") which 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
(i) gives possession of the complex to a particular person under a lease, licence or similar arrangement (other than an arrangement, under or arising as a consequence of an agreement of purchase and sale of the complex, for the possession or occupancy of the complex until ownership of the complex is transferred to the purchaser under the agreement) entered into for the purpose of its occupancy by an individual as a place of residence,
(ii) gives possession of the complex to a particular person under an agreement for
(A) the supply by way of sale of the building or part thereof in which the residential unit forming part of the complex is located, and
(B) the supply by way of lease of the land forming part of the complex or the supply of such a lease by way of assignment,
other than an agreement for the supply of a mobile home and a site for the home in a residential trailer park, or
(iii) where the builder is an individual, occupies the complex as a place of residence, and
(c) the builder, the particular person or an individual who is a tenant or licensee of the particular person 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.
[4] The Appellant interpreted subparagraph 191(1)(b)(ii) as requiring, firstly, a two part transaction or a single transaction with two components arising from one agreement; and secondly, that the developer/builder give possession before the time the transaction is subjected to a specific Schedule V exemption.
[5] Addressing the first of these conditions, the Appellant argued that in the current situation there is one property and one transaction and therefore only one component arising from the agreement; consequently the first condition is not met. He relied on the Purchase and Sale Agreement, which contains a legal description of the property being a leasehold strata lot. Clause 5 of the Purchase and Sale Agreement states:
5. LEASEHOLD INTEREST: The Purchaser acknowledges that this contract is for the purchase of an assignment of Polygon's interest in the balance of the term remaining in a pre-paid ninety-nine year strata lot lease of the individual leasehold strata lot containing the Home. ...
[6] The Appellant went on to refer to clause 3.01 in the Disclosure Statement:
...
On deposit of the leasehold strata plan in the Land Title Office and acceptance of the leasehold strata plan for registration, the ground lease which presently covers the whole of the land will be converted into separate individual Strata Lot leases with the City of Vancouver relating to the developer's interest in each leasehold strata lot in the development. The form of each of these separate Strata Lots leases is set out in the model strata lot lease ...
Upon transfer by Polygon Southampton Development Ltd. of its interest in the individual leasehold Strata Lot to the purchaser, Polygon Southampton Development Ltd., the Purchaser, and the City of Vancouver will enter into an assignment agreement in respect of the Strata Lot lease for the interest in the leasehold Strata Lot being purchased. ...
[7] The Assignment Agreement and the British Columbia Land Titles Act, 1-C likewise refer to the assignment of the vendor's interest in the strata lot, describing the property as the strata lot 16 leasehold strata plan. The Appellant's point was that there was no assignment of the ground lease, as there was a conversion of such (as between Polygon and the City of Vancouver) into the leasehold strata lot, and there was only that leasehold strata lot that is at issue between Polygon and the condo purchasers. A strata lot and strata lot lease are defined at section 92 of the British Columbia Condominium Act as:
"strata lot" means a lot so shown on a leasehold strata plan;
"strata lot lease" means a lease of a strata lot arising from the conversion of a ground lease under section 96(1), including an assignment or transmission of it, and that is subject to
(a) the rights and obligations, under sections 97 and 100 to 102, of the public authority that owns the land; and
(b) the restrictions under sections 103 and 104;
[8] Subsections 96(1) and (4) of the British Columbia Condominium Act read as follows:
(1) The deposit of the leasehold strata plan operates as a conversion of the registered ground lease into individual leases in the name of the owner developer of the interest of the Crown or other lessor in each strata lot, including its share in the common property, at a rent, premium or other consideration and subject to the applicable terms contained in the ground lease and in the model strata lot lease attached, and to the provisions of this Act and regulations.
...
(4) Every assignee of an owner developer's interest as a strata lot lessee in a strata lot shall be deemed to have covenanted and agreed in writing with the Crown or other lessor to observe and perform all of the terms and conditions contained in the model strata lot lease, but is not, notwithstanding an agreement to the contrary, bound by, or required to observe and perform, the terms, covenants and agreements contained in the ground lease that are not also contained in the model strata lot lease.
[9] The Appellant then referred me to certain definitions in the Act:
"residential condominium unit" means a residential complex that is, or is intended to be, a bounded space in a building designated or described as a separate unit on a registered condominium or strata lot plan or description or a similar plan or description registered under the laws of the province, and includes any interest in land pertaining to ownership of the unit;
"residential complex" means
(a) that part of the building in which one or more residential units are located, together with
(i) that part of any common areas and other appurtenances to the building and the land immediately contiguous to the building that is reasonably necessary for the use and enjoyment of the building as a place of residence for individuals, and
(ii) that the proportion of the lands subjacent to the building that that part of the building is of the whole building,
...
"residential unit" means
(a) a detached house, semi-detached house, row house unit, condominium unit, mobile home, floating home, or apartment,
...
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,
...
[10] These comments and statutes, the Appellant argued, support his position that the only property involved is the strata lot lease and under the Act that is an interest in a residential condominium unit: that is, only one property, only one transaction, the sale of a leasehold interest.
[11] The Appellant distinguished the sale of a building from the sale of an interest in a building, the former being the direct reference to fee simple ownership. So, in this situation only the City of Vancouver owns the building, but the developer has an interest in it, that interest being the ownership of a leasehold strata lot.
[12] The Appellant's fall-back position if I do not accept his primary argument that the transaction was a single transaction not divisible into the two legal elements required by subparagraph 191(1)(b)(ii), is that there is a significant timing problem in attempting to rely on the section 4 exemption (relied on in Taylor v. Her Majesty The Queen [1998] T.C.J. No. 617). Section 4 of Schedule V of the Act reads:
4. A supply by way of sale of a single unit residential complex (in this section referred to as the "complex") or a residential condominium unit (in this section referred to as the "unit") or an interest in the complex or unit made by a builder of the complex or unit where
(a) ...
(b) in any case, the builder received an exempt supply of the complex or unit by way of sale or was deemed under subsection 191(1) or (2) of the Act to have received a taxable supply of the complex or unit by way of sale, and that supply was the last supply of the complex or unit made by way of sale to the builder,
unless ...
This stipulates that the self-supply must have occurred before the transaction triggering the exemption. The Appellant argued that in this case the alleged self-supply may not have occurred prior to the sale to the ultimate purchaser. Paragraph 191(1)(d) sets the time of self-supply as the later of substantial completion or granting possession. The section 4 exemption refers to sale after the deemed self-supply. The date of sale in the purchase and sale agreement in this case pre-dates the possession date. The sections, the Appellant maintained, do not work together and point out that the self-supply rule was simply not meant to apply in the current situation.
[13] If the self-supply rules do not apply, then section 194 of the Act deems the purchase price to be tax included. This appears to have been agreed to by the Respondent.
[14] The Appellant briefly addressed the application of the exemption found in section 5.1 of Schedule V, though interpreted this as only arising if the transaction can be viewed as a two-part transaction. He was adamant that this indeed was not the case.
[15] The third issue presumed that there was no exemption but that the agreement was a taxable sale. How is the new housing rebate calculated? The Appellant suggested that it should be calculated on the whole purchase price, notwithstanding a calculation based on approximately 76 percent at the time of the transaction. The Appellant relied on paragraph 254(4)(d) and subsection 254(6) which read:
254(4) Where
...
(d) the builder agrees to pay or credit to or in favour of the individual any rebate under this section that is payable to the individual in respect of the complex, and
...
254(6) Where the builder of a single unit residential complex or a residential condominium unit pays or credits a rebate to or in favour of an individual under subsection (4) and the builder knows or ought to know that the individual is not entitled to the rebate or that the amount paid or credited exceeds the rebate to which the individual is entitled, the builder and the individual are jointly and severally liable to pay the amount of the rebate or excess to the Receiver General under section 264.
He also referred to Battista v. Her Majesty The Queen, [2000] T.C.J. No. 365, specifically:
... If the Act imposes a duty on a person who has collected tax to remit it in accordance with the provisions of the legislation as agent for Her Majesty, then if the remittance has been made in error it strikes me the person having remitted the tax should be able to apply for a rebate. ...
Fourthly, if Polygon is required to self-assess, is the new housing rebate calculated on the whole price or only the building value? The Appellant commenced this argument with a reference to section 254.1, specifically the definition of a long-term lease, which reads:
"long-term lease", in respect of land, means a lease under which continuous possession of the land is provided for a period of at least twenty years or a lease that contains an option to purchase the land;
Paragraph 254.1(2)(h) reads:
(h) where the fair market value referred to in paragraph (c) is not more than $374,500, an amount equal to the lesser of $8,750 and 2.34% of the total (in this subsection referred to as the "total consideration") of all amounts each of which is the consideration payable by the particular individual to the builder for the supply by way of sale to the particular individual of the building or part of a building referred to in paragraph (a) or of any other structure that forms part of the complex, other than consideration that can reasonably be regarded as rent for the supplies of the land attributable to the complex or as consideration for the supply of an option to purchase that land, and
...
[16] The Appellant focussed on the expression: "other than consideration that can reasonably be regarded as rent" and maintained there was no consideration for rental of the land. Polygon had pre-paid all basic rent to the City. Further, if the agreement with the purchaser involved a single consideration for a strata lot lease, no allocation is appropriate. There is certainly no allocation to assets such as fridge, dishwasher, washer and dryer. They are all simply incidental to the single supply of the strata lot lease. The Appellant also relied on sections 136 and 138 of the Act in support of the single supply contention along with the case of Hidden Valley Golf Resort v. Her Majesty The Queen, [2000] F.C.J. No. 869. Finally, the Appellant attempted to distinguish the Taylor decision on two fronts: first, that the definition of "home" as set forth in the contract of purchase and sale in the case before me has no significance vis-à-vis the legal definition of the real property being transferred and second, the present strata lot lease, unlike the one in Taylor, requires simply a surrender as opposed to a buy-back at fair market value. There are no formulas in the agreement for determining fair market value. This appeared to play a significant role in the wording in the Taylor case, leading to a finding these were the requisite two elements for the application of subsection 191(1)(b)(ii).
RESPONDENT'S POSITION:
[17] The Respondent suggested the appeal was a full frontal challenge to the Taylor decision, as the facts were indistinguishable. The different wording in the current contract calling for a surrender rather than a repurchase at fair market value was not really a difference, as the Condominium Act required fair market value be paid on surrender. So, even though the contract talked in terms of surrender, the legislation required the surrender could not take place for nothing, in effect the same result as Taylor.
[18] Respondent's counsel relied on the Taylor decision. She maintained that decision was completely consistent with the rationale behind the self-supply provisions. She cited from Taylor an excerpt from the Finance Department's news release regarding subparagraph 191(1)(b)(ii):
The Act will be amended to ensure that where a builder of a new residential complex supplies by way of lease the land related to the complex to a lessee or assigns his or her interest in a lease of that land to a lessee, the builder is subject to the same self-supply rules as if the builder had supplied by way of lease both the land and the building related to the complex to the lessee. At the time the builder transfers possession of the complex to the lessee, the builder shall be deemed, at that time, to have sold the land and building for their fair market value and to have paid as a recipient and collected as a supplier tax on the deemed sale ...
[19] The Respondent argued that Chief Judge Garon was correct in not requiring a separate conveyance of the land and of the residential unit. He stated in Taylor:
In conclusion, I am of the opinion that the Appellants obtained an equity, an ownership in their respective condominium units, in addition to their respective interests in the strata lot leases.
[20] Further, notwithstanding provisions of the Condominium Act prohibiting a separate conveyance of the land from the building, Chief Judge Garon found the following:
As mentioned above, Counsel for the Respondent argued that subparagraph 191(1)(b)(ii) does not apply here because that subparagraph contemplates a two-step transaction and the land and the strata unit cannot be conveyed separately in view of section 12 of the Condominium Act.
I do not see any clear requirement in that subparagraph 191(1)(b)(ii) for a separate conveyance of the land and of the residential unit. Rather, it seems to me that what is contemplated could be done in a single transaction consisting of two different elements, the assignment of a leasehold interest in the land and the sale of a building. In any event, here, we have two Contracts of Purchase and Sale (respectively dated February 8, 1994 and June 19, 1994), dealing with the purchase of a prepaid leasehold interest in the proposed strata lot and the purchase of a particular "Home" and other items and subsequently two assignments to which UBC had consented, respectively dated July 8, 1994 and August 3, 1994.
[21] With respect to the timing issue of the self-supply and the application of the exemption found in section 4 of Schedule V, the Respondent raised two flaws with the Appellant's argument. First, she maintained it results in double taxation as the self-supply rule will apply, but no exemption would be available to the purchaser: section 191 does not depend on the application of the section for exemption. Second, as possession always follows substantial completion this effectively neuters the section 4 exemption. The self-supply only kicks in on possession, yet the exemption is only on sale, therefore section 4 would never be triggered. The Respondent contended that this interpretation by the Appellant is based on a misreading of the expression "deemed to have received" in section 4. The Respondent submitted that this refers to the application of the deeming section and not to the event of substantial completion or possession.
[22] The Respondent directed me to an alternative exempting provision should I find the timing issue renders section 4 inapplicable. Section 5.1 of Schedule V reads:
5.1 A supply by way of sale of a building, or that part of a building, in which one or more residential units are located, or an interest in such a building or part, where
(a) both immediately before and immediately after the earlier of the time ownership of the building, part or interest is transferred to the recipient of the supply (in this section referred to as the "purchaser") and the time possession thereof is transferred to the purchaser under the agreement for the supply, the building or part forms part of a residential complex; and
(b) immediately after the earlier of the time ownership of the building, part or interest is transferred to the purchaser and the time possession thereof is transferred to the purchaser under the agreement for the supply, the purchaser is a recipient described in subparagraph 7(a)(i) of an exempt supply, described by paragraph 7(a), of the land included in the complex.
[23] Whether this exemption or the section 4 exemption applies, the Respondent contended that the tax result is the same, and the Appellant's argument with respect to timing does not defeat the application of subparagraph 191(1)(b)(ii) in the situation before me.
[24] The Respondent urged me to follow the Taylor decision, acknowledging that while not binding on me, it would be a disservice to litigants, lawyers and inferior courts to not follow a prior decision of another Judge of the same Court, except in exceptional circumstances. She contended it is for the Court of Appeal, not individual judges of equal jurisdiction, to correct judicial error, if indeed there is one.
[25] Regarding the new housing rebate, the Respondent argued that section 254 simply does not apply as it applies only to fee simple transfers, so she concentrated on section 254.1 and specifically subsection (h). This requires the Minister to pay a rebate to the particular individual equal to the lesser of $8,750 and 2.34% of the total of all amounts each of which is the consideration payable by the particular individual for the part of the building referred to in paragraph (a) or of any structure that forms part of the complex, other than consideration that can reasonably be regarded as rent for the supplies of the land attributable to the complex.
[26] The Respondent felt that 24% of the purchase price related to the land; this was an amount the Appellant had in fact initially provided, and one which the Respondent argued was reasonable.
[27] Section 254.1, according to the Respondent, required two elements, in effect, a dual supply, which in this case would be the assignment of a long-term lease and sale of a residential condominium unit. As in Taylor, a single supply comprised of two parts.
[28] Further, the Respondent indicated that the rebate, if found to be based on something greater than 76% would create a windfall for the Appellant to which it was not entitled, as any rebate belonged to the purchaser. The Respondent relied upon section 234 in support of her position, as it stipulates builders get a deduction for the new housing rebate only to the extent those new housing rebates have been paid or credited to the purchaser. The purchaser may be entitled to more, but not the builder. If I were to find the Appellant entitled to some additional rebate, the Respondent suggests that this would not preclude the purchasers from looking to the Minister for their rightful additional entitlement.
ANALYSIS:
[29] The central issue in this appeal, and what goes to the core of the Taylor decision is the applicability of the self-supply rules to the Appellant's situation.
The particular paragraph at issue is subparagraph 191(1)(b)(ii), which on its ordinary meaning requires two elements; the sale of all or part of a building and an assignment of a lease of the land. Do the unique features of British Columbia law, specifically the Condominium Act, as they apply to the Appellant's circumstances fit squarely within this ordinary wording. Chief Judge Garon in Taylor found that indeed they did. While recognizing British Columbia law prohibited two transactions to transfer the property, being land and building, Chief Judge Garon found:
In my view, the transactions between Polygon and the Appellants involve not only the assignment by Polygon of its interest in the strata lot leases, but also the sale by Polygon of the condominium units in question to the Appellants.
...
In conclusion, I am of the opinion that the Appellants obtained an equity, an ownership in their respective condominium units, in addition to their respective interests in the strata lot leases.
[30] The Appellant's main thrust is that there are not two supplies occurring here, there is just the one and that is a sale of a leasehold interest. While I do accept that there is only one transaction, being the sale of a leasehold interest for purposes of British Columbia real property law, I must decide whether that sale is capable of being broken down into two legal elements or supplies (the assignment of the lease and a sale of a building) for purposes of the Act.
[31] It is too much to expect that federal legislation, especially a statute as intricate as the Act, can be tailored to reflect every nuance of provincial legislation, thus there is no reference in the Act to the British Columbia strata lot lease. It therefore becomes essential to not only determine if the words of the federal legislation capture the essence of the transaction as determined by provincial laws, but also to ascertain if the intention of the federal legislation is directed at this particular type of transaction. This latter analysis is no easy task given the dearth of material surrounding the introduction of subparagraph 191(1)(b)(ii). I will look more closely to the words of the section and their context before embarking on the legislative intent journey.
[32] It is helpful to start with a review of the definitions found in paragraph 191(1)(b):
"residential complex"
"residential condominium unit"
"residential unit"
have all been defined earlier in this judgment at paragraph [9]. "Building" is not defined. "Builder" is defined but needn't be reproduced as there is no argument that the Appellant is in fact a builder.
[33] Although a residential condominium unit includes both the building and land in its definition, subparagraph 191(1)(b)(ii) makes it clear that those two elements may be divided for purposes of transferring possession to a purchaser. This subsection also does not require two separate agreements for such transfer as the provision reads, "under an agreement for the sale of the building and the assignment of lease of the land". It seems to contemplate that these two elements form part of one agreement. Yet clearly such an agreement must have both elements. If both elements exist, then the builder is deemed to have made and received a taxable supply by way of sale of a complex. The provision I would suggest has an ordinary meaning which is clear.
[34] The context of the subsection is that it is found in the self-supply rules. Paragraph 191(1)(b) describes three scenarios of a self-supply by a builder: first (191(b)(i)), in the situation of a lease (other than if the lease is for a short term occupancy pending an ultimate sale); second (191(b)(iii)) in the situation of an individual builder occupying a unit; and third, the combined sale and lease arrangement we are seeking to interpret here. This third situation was not a part of the original section but came into force on December 17, 1990 as an amendment to this subsection. Nothing further as to its meaning can really be gleaned from the context. This self-supply rule captures a two-pronged agreement, the two prongs consisting of a sale of a building and assignment of lease of land.
[35] What, however, was the legislators intent in adding this third scenario to the self-supply rule? What abuse was being sought to overcome? Before exploring that further, I will consider what was the purpose of the self-supply rules prior to the amendment. My understanding is that the purpose of the self-supply rules was to remove any possible advantage by way of GST savings from a builder who builds units to lease or personally occupy, in comparison to someone else who buys such units for the same purpose of either leasing or occupying. So, if I want to buy a number of newly constructed units to rent out to others, I would be subjected to GST on such a purchase. The rationale is that a builder with a similar purpose cannot escape such similar liability.
[36] The same holds true if I simply want to buy the new unit to live in it. The individual builder is likewise subjected to GST as a result of subparagraph 191(1)(b)(iii). The purpose seems quite straightforward to put a builder on the same footing as a third party with a like purpose.
[37] The amendment introducing subparagraph 191(1)(b)(ii) does not seem to read as easily from the perspective of discerning its purpose. In either the lease or occupancy scenario the self-supply rule works to put the builder in the same position GST-wise as a third party who acquires the property to lease or occupy, but in considering the amendment, what third party is the builder being compared to. Presumably, a third party who likewise intends to lease the land and sell the building. I think the clue to the true purpose is found in the Department of Finance news release. This bears repeating:
The Act will be amended to ensure that where a builder of a new residential complex supplies by way of lease the land related to the complex to a lessee or assigns his or her interest in a lease of that land to a lessee, the builder is subject to the same self-supply rules as if the builder had supplied by way of lease both the land and the building related to the complex to the lessee. At the time the builder transfers possession of the complex to the lessee, the builder shall be deemed, at that time, to have sold the land and building for their fair market value and to have paid as a recipient and collected as a supplier tax on the deemed sale ...
[38] The note suggests that if any element of a transaction is in the nature of a lease, then the whole transaction will in effect be looked upon as a lease; and, as a lease is caught by the self-supply provisions, so too will this "deemed" lease. This implies that the advantage arises by a builder being able to lease pre-GST liability compared to the third party who would have to incur the GST before being in a position to lease. I presume the legislators did not view subparagraph 191(1)(b)(i) as being applicable to the lease portion of a combined lease of land and sale of building agreement, and without the self-supply rule in effect, the builder could attribute a significant portion of the consideration to the lease. This might provide some advantage over a third party who had to pay GST on the combined lease/sale, before turning around and entering a similar lease/sale arrangement.
[39] I cannot find any example of a scenario at the time of the amendment which the Department of Finance was specifically addressing with the amendment, so I am left to surmise that the legislators intended that anything that smacks of a lease could potentially provide an advantage to a builder over a third party. Given this conclusion, then in applying subparagraph 191(1)(b)(ii) the key is not so much the form of the two elements but whether in substance there is an element of a lease. This would then taint the whole transaction to being in the nature of a lease and subject to the self-supply rules.
[40] Applying this interpretation then to the facts before me, it matters not what form the transaction takes, what is crucial is whether in substance an assignment of an interest in a strata lot lease is an assignment of the lease of the land, effectively bringing the whole transaction within the self-supply rules. To find that it is not (and that the self-supply rules therefore do not apply) am I providing some advantage to the builder over a third party? If some portion of the consideration on the sale to a purchaser related to the lease, and such portion was not subject to GST, then yes the builder could be seen as deriving some advantage. But here the very essence of the Appellant's argument is that the consideration is not divisible, as the transaction is not divisible. In a situation such as this where the builder disposes of all its interest to a third party purchaser for one consideration, all of which would be subject to GST but for the self-supply rules, there does not appear to be any advantage attaching to the builder which would invoke any need for applying the self-supply rule. This is not intended to be a back-door analysis into finding there is not an assignment of a lease, but it does assist me in coming to grips with the true nature of the disposition as well as the true purpose of subparagraph 191(1)(b)(ii). I find that the situation before me does not cry out for the application of the self-supply rule based on the purpose of the rule. It then comes down to the issue of whether, based on the ordinary wording of the rule, a sale or assignment of an interest in the strata lot lease is indeed an assignment of a lease of land for purposes of the Act and simply caught by the words. The answer to that cannot be determined by the Act, which offers no guidance as to what is or is not an assignment of lease, but must be found by reference to British Columbia real property law.
[41] Looking then at the documents constituting the transaction between the Appellant and purchaser I note the following: in the Purchase and Sale Agreement, paragraph 5 reads:
5. LEASEHOLD INTEREST: The Purchaser acknowledges that this contract is for the purchase of an assignment of Polygon's interest in the balance of the term remaining in a pre-paid ninety-nine year strata lot lease of the individual leasehold strata lot containing the Home. The individual strata lot lease to be assigned to the Purchaser will be entered into by Polygon and the strata corporation following deposit in the Land Title Office of the leasehold strata plan. The form of individual strata lot lease is identified as the 'model strata lot lease' in the ground lease entered into between Polygon and the City of Vancouver (the "City") registered in the Land Title Office under number BL152744 (the "Ground Lease"). Additional particulars of the Ground Lease and the individual strata lot lease are described in paragraph 3 of Polygon's Disclosure Statement.
Paragraph 6 reads:
6. TITLE: Polygon shall assign its interest in the individual strata lot lease in respect of the Home free and clear of all financial liens, charges or encumbrances. Title to the land on which the development is situated is registered in the name of the City and in addition to the Ground Lease and the documents, interests, charges and encumbrances contemplated thereby, title to the land and therefore the individual strata lot lease is subject to subsisting conditions, provisions, restrictions, exceptions and reservations, including royalties, contained in the original grant or contained in any other grant or disposition from the Crown; and registered, pending or proposed restrictive covenants, rights-of-way and easements in favour of utilities, public authorities, governments or others as required to facilitate the development.
[42] In the Assignment Agreement, paragraphs 1 and 2 read:
1. In consideration of the sum of $249,900.00 paid by the PURCHASER to the VENDOR (the receipt whereof is hereby by the VENDOR acknowledged), the VENDOR as beneficial owner hereby assigns to the PURCHASER the VENDOR's interest in the STRATA LOT, to hold unto the PURCHASER for all the residue now unexpired of the term of the LEASE subject to the payment to the CITY of the rent reserved in the LEASE, to the performance and observance of the covenants on the part of the lessee to be performed and observed, and the conditions contained in the LEASE.
2. The PURCHASER covenants with the VENDOR and the CITY and each of them that the PURCHASER shall during all the residue now unexpired of the term of the LEASE and every renewal thereof perform and observe the covenants on the part of the lessee to be performed and observed and the conditions contained in the LEASE as fully and effectually as if the LEASE contained a separate demise of the STRATA LOT at the rent referred to in the LEASE.
[43] In the Strata Lot Lease itself, paragraph 21.01 reads:
At the expiration or sooner determination of the TERM, the LESSEE shall surrender the STRATA LOT (including the interest of the LESSEE in COMMON PROPERTY or in any COMMON FACILITY) to the LESSOR in the condition in which it was required to be kept by the LESSEE under the provisions of this lease, except as herein otherwise expressly provided.
and paragraph 26.01 reads:
In the event that the terms of this MODEL STRATA LOT LEASE or the duties and obligations of the LESSOR, the LESSEE or the STRATA CORPORATION under the terms of this MODEL STRATA LOT LEASE conflict or are inconsistent with the provisions of the CONDOMINIUM ACT applicable to leasehold STRATA LOTS the said provisions of the CONDOMINIUM ACT shall prevail.
[44] And in the Disclosure Statement, paragraph 3.01 reads:
3.01 Registered Owner
Title to the land is registered in the name of the City of Vancouver. Polygon Southampton Development Ltd. holds a leasehold interest in the land under terms of a prepaid ground lease in the form required by the City of Vancouver for a term of 99 years from April 28, 1997 expiring April 27, 2096. This ground lease is registered in the Land Title Office under number BL152744. A copy of the ground lease is available for inspection at any time during the business hours Monday through Friday at the Developer's offices, or at its sales office located on the lands.
...
Upon transfer by Polygon Southampton Development Ltd. of its interest in the individual leasehold Strata Lot to the purchaser, Polygon Southampton Development Ltd., the Purchaser, and the City of Vancouver will enter into an assignment agreement in respect of the Strata Lot lease for the interest in the leasehold Strata Lot being purchased. ...
Pursuant to the terms of Article 3 on the model strata lot lease, the Purchaser of the individual leasehold Strata Lot will be responsible for payment of property taxes levied by the City of Vancouver. If the property is exempt from taxes by reason of ownership of the lands by the City of Vancouver, then the Purchaser will pay an amount equal to taxes that would otherwise have been assessed directly to the City of Vancouver as additional rent.
[45] It is significant that in all these instances reference is not made to an assignment of a lease, but an assignment of Polygon's interest in the strata lot lease. The words in the disclosure I believe best capture the legal essence of the transaction, and that is the transfer by Polygon of its interest in the strata lot to a purchaser requiring, in addition to the transfer document between Polygon and the purchaser, an assignment agreement for the interest in the leasehold strata lot being purchased. So, rather than referring to a lease as such, the parties referred to an interest in a leasehold strata lot. When I consider that this interest is a 99 year interest, and assuming the life of a west-coast condominium in most likelihood falls shy of a century I find that the interest being disposed of by the Appellant is not an assignment of lease within the meaning of the Act, but more in the nature of a sale for purposes of the Act. This is further supported by the characteristics attributed to a strata lot lease by the Condominium Act.
[46] The strata lot leases arise as a result of being on Crown land. They are born of a ground lease[1] by the Crown or other public authority, in this case the City of Vancouver. The very starting point is that this land cannot be transferred as an ordinary fee simple, it is Crown land. So the Crown does the next best thing and converts the ground lease into strata lot leases for a term of 99 years. Section 94 prohibits the registration of a leasehold strata plan unless it is with respect to Crown land. The Crown has certain rights and obligations in connection with its ongoing ownership of the land. Section 97 requires the Crown to purchase the strata lot lessee's interest in the strata lot on termination of the strata lot lease. There is something to buy: there is no automatic reversion to a "landlord". Section 98 also suggests that we are dealing with something other than a standard lease. It stipulates that if a strata lot lessee defaults under the strata lot lease, the Crown, though entitled to re-enter and take possession of the strata lot, shall not do so, nor shall it cause a strata lot lease to be terminated, but may only apply to the Court for an order for sale. Again, we see terms more in the nature of sale than lease.
[47] I compare the developer who sells a strata lot (that is, a condominium not on Crown land) to the developer who sells all of its interest in a strata lot lease (a condominium on Crown land) and I see no difference justifying the application of the self-supply rules in the latter case. Purchasers in both cases would consider themselves owners. I would not want to suggest to the owner of the strata lot lease that he has a diminished interest as a tenant only of the land. Both own condominiums with the same rights and obligations. The technical legalities of that ownership under British Columbia law should not trip up the developer in the application of federal laws.
[48] The Strata Lot lease is a unique bit of real property law in Canada. It is as close to third party ownership of Crown land as an individual can get. I find the sale by the Appellant of an interest in a strata lot lease is not an assignment of lease contemplated by subparagraph 191(1)(b)(ii). It is indeed something different; something that does not fit within the requirements of subparagraph 191(1)(b)(ii).
[49] Given my finding on this point, I need not address the timing difficulties in connection with the application of the Schedule V, section 4 exemption.
[50] Counsel for the Respondent forecast dire consequences in sending the British Columbia real estate industry into a top-spin if I decide differently from the Taylor decision. She went so far as to suggest it would be a disservice to litigants and lawyers who are entitled to see the law as reasonably settled and certain. While this sentiment strikes me as putting some serious handcuffs on judicial independence, I do appreciate the concern. This is a court of first instance. Every matter before us will have its own unique ebb and flow; different appellants, different counsel, different arguments, different facts however slight, all contributing to different decisions. Certainly there must be consistency in the application of our complex tax laws, and certainly I should not depart lightly from a decision which appears to be on all fours, but these principles should not relieve me of my responsibility to judiciously consider the facts and arguments presented to me in this particular case and apply the law accordingly.
[51] The Appellant before Chief Judge Garon was a purchaser of the condominium. The Appellant before me was a developer of the condominium complex. The condominiums in issue before me are not the same as the ones before Chief Judge Garon; the contracts are slightly different, although admittedly the basic substance of the transaction is similar. Chief Judge Garon had no opportunity to hear the developer argue his position, and it appears from a review of his decision that the Appellant before him had little to say regarding the self-supply rule. This issue was clearly carried by the Crown. Chief Judge Garon supported his conclusion that there was a separate assignment of lease and sale of building by relying on paragraph 26.01 of the strata lot lease before him. That provision provided for the determination of price on termination on the basis that only the building comprising the strata lot and the interest in common property constituted the interest to be valued. No such provision is in the strata lot lease before me. I find this is a significant difference given the reliance placed on this provision by Chief Judge Garon.
[52] I am left to deal with the new housing rebate. Given my finding that subparagraph 191(1)(b)(ii) does not apply, then I am not dealing with section 254.1, but section 254, in addressing this issue. The Appellant feels entitled to claim a rebate greater than already claimed, as it was previously claimed on only 76% of the total purchase price. The Respondent's argument is that only the purchaser of the condominium is entitled to claim anything further. I am satisfied that the rebate should have been based on 100% of the purchase price, as the sale of the interest in the strata lot was a taxable supply.
[53] A condition for section 254 to apply is that the GST payable on the sale has actually been paid. Applying section 194, as indicated earlier, there has been a deemed payment, so this condition has been met. The deemed payment would be based on the total consideration, not on a percentage. The actual rebate credited at closing was only based on consideration of 76% of the total purchase price. The issue is who is entitled to the excess rebate not yet claimed.
[54] Generally the rebate belongs to the purchaser, unless there is an agreement to pay it over to the builder. The Appellant in an addendum to the Purchase and Sale Agreement stipulated:
If the purchaser is eligible for a GST new housing rebate ... and completes such forms as may be reasonably required to assign the benefit of such rebate to Polygon, then Polygon agrees to grant a credit to the purchaser towards the purchase price ...
[55] The closing statement of adjustments indicates that such a credit was granted, as permitted by subsection 254(4), based on the lower consideration. In effect, the Appellant over-calculated the GST by under-calculating the rebate, and consequently the purchaser paid too much cash on closing to the Appellant by the amount of the unclaimed rebate. Is the purchaser entitled to look to Polygon or look to the Minister for the shortfall? The purchaser relied on Polygon to determine the tax involved and consequently paid too much. The purchaser can look to Polygon for relief.
[56] Section 234 permits a builder who has credited the rebate on closing to a purchaser (pursuant to subsection 254(4)) to deduct that amount from the net tax the builder is to remit for the particular reporting period. If the builder over-remits because of a mistaken under-calculation, it follows the builder is entitled to recover that amount from the Minister. The position of the Appellant is as the Crown's agent to collect tax. In this case the Appellant has collected too much (by short-changing the rebate), is responsible to pay back the difference to the purchaser, and seeks to recover that overpaid difference from the Minister. I do not believe the purchaser has limited its right to the mistaken amount of the rebate, as the Respondent argued.
[57] In summary, I find the Appellant is not obliged to self-assess pursuant to subparagraph 191(1)(b)(ii) in the particular case before me. I do find that section 194 applies to this situation and that the purchase price for a strata lot lease is deemed to be GST included. With respect to the new housing rebate, subsection 254(5) applies such that the new housing rebate is to be calculated on the whole purchase price for each strata lot lease. Further, the Appellant is entitled to the unclaimed rebate from the Minister.
[58] I find further that it is not appropriate in this matter to award costs.
Signed at Ottawa, Canada this 4th day of February, 2002.
|
"Campbell J. Miller" |
J.T.C.C.
COURT FILE NO.: 2000-4613(GST)I
STYLE OF CAUSE: Polygon Southampton Development Ltd. v. Her Majesty The Queen
PLACE OF HEARING: Vancouver, British Columbia
DATE OF HEARING: November 20, 2001
REASONS FOR JUDGMENT BY: The Honourable Judge Campbell J. Miller
DATE OF JUDGMENT: February 4, 2002
APPEARANCES:
Counsel for the Appellant: Carl E. Beck
Counsel for the Respondent: Lynn M. Burch
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
[1] Ground lease is defined in section 92 of the Condominium Act as:
"ground lease" means a lease of land made for the purpose of this Part by the Crown, the federal Crown, a municipality, regional district or other public authority and registered in the books of the land title office;