[OFFICIAL ENGLISH TRANSLATION]
2001-2207(GST)I
BETWEEN:
LES IMMEUBLES LE SÉJOUR INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on March 12, 2002, at Québec, Quebec, by
the Honourable Judge François Angers
Appearances
Counsel for the Appellant: Jean-Paul Boucher
Counsel for the Respondent: Ghislaine Thériault
JUDGMENT
The appeal from the assessment made under the Excise Tax Act, the notice of which is numbered 0220448 and is dated March 16, 2001, for the period from January 1 to December 31, 1998, is dismissed.
Signed at Edmundston, New Brunswick, this 20th day of August 2002.
|
"François Angers" |
J.T.C.C.
Translation certified true
on this 26th day of November 2003.
Sophie Debbané, Revisor
[OFFICIAL ENGLISH TRANSLATION]
Date: 20020820
Docket: 2001-2207(GST)I
BETWEEN:
LES IMMEUBLES LE SÉJOUR INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Angers, J.T.C.C.
[1] This appeal is from an assessment concerning the Goods and Services Tax ("the GST"), interest, and penalties, made under the applicable provisions of the Excise Tax Act ("the Act"). The assessment dated March 16, 2001, and covering the period from January 1 to December 31, 1998, deals primarily with the application of the GST following a September 1, 1995, change in the use of a residential complex.
[2] The appellant is a duly incorporated company. On May 12, 1995, it completed construction of a building located at 166, rue de l'Hôtel-de-Ville, Rivière-du-Loup, Quebec. This building was divided into 12 residential units, each with five bedrooms, a living room, a kitchenette and two bathrooms. According to Edgar Fraser, who became the main shareholder of the appellant on the same date¾May 12, 1995¾the use of the building was room rental: to students during the academic year, that is, from September 1 to May 31; and to tourists from June to August.
[3] When Mr. Fraser purchased the shares, the appellant already had in its possession 58 room rental leases signed by students for the period from September 1, 1995, to May 31, 1996. During the tourist season, the appellant hired reception and room service employees, whose employment was terminated at the end of August.
[4] Mr. Fraser claimed that each year his building is occupied by tourists in a proportion of 25 per cent and by students, for residential accommodation, in a proportion of 75 per cent.
[5] Under cross-examination, Mr. Fraser acknowledged that in 1995 and 1996 some students took possession of their rooms as early as two weeks before the September 1 date indicated in the lease. He added moreover that these students often left before the date indicated in the lease. He further explained that at the Rivière-du-Loup CÉGEP the academic year starts on August 21 and ends on May 15, whereas at the trade school the academic year begins on September 2 or 3 and ends only in June.
[6] Mr. Fraser acknowledged that during the summer some rooms might be rented as residential accommodation for short periods such as one week, although some rooms were rented for more than one month. The building is located near the above-mentioned educational institutions and certain tourist attractions.
[7] The respondent called as a witness Jacques Cimon, an auditor and appraiser with the Canada Customs and Revenue Agency, and Julie Bouchard, an accountant and objections officer employed by the same Agency. These two witnesses explained their work in the appellant's case. Early in 2000, Mr. Cimon met with Jean Beaumont, a former shareholder of the appellant, in order that the appellant's business operations be explained to him. He learned from Mr. Beaumont that the use of the appellant's building is tourist accommodation during the summer and residential accommodation during the other three seasons. Mr. Cimon examined the appellant's financial statements going back to the beginning of its operations; he also examined how the appellant treated the GST when it purchased the building in 1995. He found no reference to the GST when the building was purchased in May 1995 but noted that, on the appellant's annual GST return filed in December 1995, the appellant paid 50 per cent of the GST, claiming that half its operations were GST-taxable and the other half were GST-exempt.
[8] Mr. Cimon therefore analysed the use of the appellant's building. He consulted his Department's Policy Statement P-099 in order to ascertain the meaning of the words "hotel", "motel" and "inn"; he also consulted the Act and its definitions, as well as the municipal by-laws of the city of Rivière-du-Loup in effect at the time of the construction of the building and at the time of his investigation. As well, he examined the application for a construction permit and the services offered by the appellant to tourists and to tenants. The application was for a permit to construct 12 residential units in a location where, at the time, the zoning allowed for commercial use. According to Mr. Cimon, this use would no longer be allowed today. Mr. Cimon found it difficult to conclude that the appellant's business was of the hotel or motel type since that use was not exercised throughout the year. According to Mr. Cimon, the building was a residential complex, although strictly speaking the appellant's operations do not correspond to this term as defined in the Act. Mr. Cimon ultimately concluded that the appellant's building should be considered a hotel or motel for part of the year, that is, the summer.
[9] Concerning the application of the GST, Mr. Cimon stated that he examined a pro forma balance sheet as well as financial statements of the appellant, in order to find a fair and reasonable method of determining the proportion of the appellant's operations that is GST-taxable and the proportion that is GST-exempt. The first method he used was to compare the number of nights the rooms were rented to tourists with the number of nights the rooms were rented to tenants; the resulting proportions were 3 per cent for tourists and 97 per cent for tenants. The second method was to compare the income earned from each type of operation; the resulting proportions were 15 per cent from tourists and 85 per cent from tenants.
[10] The third method, and the one Mr. Cimon applied, was to compare the number of days the appellant made rooms available to tourists, that is, from June 20 to August 31 of each year, with the number of days the appellant made rooms available to tenants, that is, from September 1 to June 19; the resulting proportions were approximately 19 per cent for tourist accommodation and 81 per cent for residential accommodation. Therefore, under subsection 206(5) of the Act, the respondent made an assessment that the building was GST-exempt in a proportion of 81 per cent.
[11] The appellant sent the Minister an objection to this reassessment. As grounds for the objection, it stated, first, that the building's market value used as a basis for computing the GST was too high and, second, that the proportion of the use of the building as tourist accommodation was incorrect. Instead, the appellant suggested proportions of 75 per cent and 25 per cent. As a last ground of the objection, the appellant requested that the use of the land be considered separately from the use of the building since part of the land used for parking was not used in the winter. Ms. Bouchard, an accountant and objections officer with the Canada Customs and Revenue Agency, disallowed this last ground because the building is attached to the land and the property must be considered as a whole.
[12] Concerning the first ground of the objection, Ms. Bouchard said that the appellant requested that the $678,800 municipal appraisal by the city of Rivière-du-Loup be used. The market value used by the Minister was based on the $838,000 purchase price the appellant paid for the building in May 1995. The appellant provided the tax authorities with a September 1, 1995, appraiser's report indicating a market value for the appellant's building of $730,000, including taxes. Ms. Bouchard found that value odd in light of the $838,000 purchase price paid a few months earlier. In order to settle the matter, she decided to make the assessment on the basis of the indicated market value of $730,000, including taxes.
[13] Ms. Bouchard testified that, like the auditor, she wondered about the second ground of the objection: that the proportion of the use of the building as tourist accommodation was incorrect. She stated that she examined the auditor's report, the advertising brochures distributed by the appellant, and the residential leases, and took into account the length of the tourist season. Her analysis of all this material led her to conclude that the proportion determined by the auditor was closer to reality than the proportion suggested by the appellant.
[14] Like Mr. Cimon, the auditor, Ms. Bouchard testified that she wondered how to apply the GST following the change in use that took place in September 1995. She stated that she examined subsections 191(3), 206(5) and 206(4) of the Act, as well as Policy Statement P-099. Unlike the auditor, she concluded that on September 1, 1995, the use of the building as tourist accommodation ceased entirely and no longer existed at that time, with the result that there was no longer any need to assign a proportion to that use of the building. Under subsection 206(4) of the Act, the GST was therefore payable on the entire building, that is, in a proportion of 100 per cent. The March 16, 2001, assessment (Exhibit I-5) was therefore made on the basis of this conclusion.
[15] In her pleadings, the respondent also argued that the primary use of the building throughout the year meant that it was a residential complex and that renting the residential units to tourists for a few weeks during the summer was insufficient to change this use. The use of the building as tourist accommodation was merely accessory to the use as residential accommodation and was clearly insufficient to make the building lose its nature as a residential complex. Instead, this accessory use of the building would constitute self-supply of a multiple unit residential complex and GST would be collected under subsection 191(3) of the Act. According to the respondent, the result would essentially be the same as if subsection 206(4) of the Act were applied, as did Ms. Bouchard.
[16] At the start of the hearing, the appellant abandoned the part of its appeal regarding the market value. The market value used in this case will therefore be $730,000, including taxes. The Court cannot grant the appellant's request that, in determining GST-taxable activities, the use of the land be considered separately from the use of the building since part of the land was not maintained in the winter: the land and the building form a single unit.
[17] At issue therefore is the exact nature of this building on September 1, 1995, for the purposes of the Act. The Act sets out certain definitions that are of assistance in making this determination. The term "residential unit" is defined in subsection 123(1) as follows:
"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 term "residential complex" is also defined in this subsection, as follows:
"residential complex" means
(a) that part of a 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 proportion of the land subjacent to the building that that part of the building is of the whole building,
...
but not include a building, or that part of a building, that is a hotel, a motel, an inn, a boarding house, a lodging house or other similar premises, or the land and appurtenances attributable to the building or part, where the building is not described in paragraph (c) and all or substantially all of the leases, licences or similar arrangements, under which residential units in the building or part are supplied, provide, or are expected to provide, for periods of continuous possession or use of less than sixty days;
Lastly, the term "multiple unit residential complex" is defined as follows:
"multiple unit residential complex" means a residential complex that contains more than one residential unit, but does not include a condominium complex;
[18] Clearly, then, what is involved here is a multiple unit residential complex newly constructed by the appellant, whose main intention was to rent these units for residential purposes. The permit issued was indeed for the construction of 12 residential units. As well, when the appellant sold its shares, it already had in its possession 58 duly signed leases covering a period from September 1 to May 31, that is a period of over 60 days in each case. Each of the rooms in the 12 residential units was therefore covered by a lease.
[19] Subsection 191(3) of the Act provides for self-assessment by a builder of a multiple unit residential complex when certain conditions are met, as follows:
191(3) Self-supply of multiple unit residential complex - For the purposes of this Part, where
(a) the construction or substantial renovation of a multiple unit residential complex is substantially completed,
(b) the builder of the complex
(i) gives, to a particular person who is not a purchaser under an agreement of purchase and sale of the complex, possession of any residential unit in the complex under a lease, licence or similar arrangement entered into for the purpose of the occupancy of the unit by an individual as a place of residence,
(i.1) gives possession of any residential unit in the complex to a particular person under an agreement for
(A) the supply by way of sale of the building or part thereof forming part of the complex, 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, or
(ii) where the builder is an individual, occupies any residential unit in 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 a residential unit in 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 unit is so given to the particular person or the unit 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.
[20] For this rule to be applicable, the appellant must be the builder, as defined in subsection 123(1) of the Act, as follows:
"builder" of a residential complex or of an addition to a multiple unit residential complex means a person who
(a) at a time when the person has an interest in the real property on which the complex is situated, carries on or engages another person to carry on for the person
(i) in the case of an addition to a multiple unit residential complex, the construction of the addition to the multiple unit residential complex,
(ii) in the case of a residential condominium unit, the construction of the condominium complex in which the unit is situated, and
(iii) in any other case, the construction or substantial renovation of the complex,
(b) acquires an interest in the complex at a time when
(i) in the case of an addition to a multiple unit residential complex, the addition is under construction, and
(ii) in any other case, the complex is under construction or substantial renovation,
(c) in the case of a mobile home or floating home, makes a supply of the home before the home has been used or occupied by any individual as a place of residence,
(d) acquires an interest in the complex
(i) in the case of a condominium complex or residential condominium unit, at a time when the complex is not registered as a condominium, or
(ii) in any case, before it has been occupied by an individual as a place of residence or lodging,
for the primary purpose of
(iii) making one or more supplies of the complex or parts thereof or interests therein by way of sale, or
(iv) making one or more supplies of the complex or parts thereof by way of lease, licence or similar arrangement to persons other than to individuals who are acquiring the complex or parts otherwise than in the course of a business or an adventure or concern in the nature of trade, or
(e) in any case, is deemed under subsection 190(1) to be a builder of the complex,
but does not include
(f) an individual described in paragraph (a), (b) or (d) who
(i) carries on the construction or substantial renovation,
(ii) engages another person to carry on the construction or substantial renovation for the individual, or
(iii) acquires the complex or interest in it,
otherwise than in the course of a business or an adventure or concern in the nature of trade,
(g) an individual described in paragraph (c) who makes a supply of the mobile home or floating home otherwise than in the course of a business or an adventure or concern in the nature of trade, or
(h) a person described in any of paragraphs (a) to (c) whose only interest in the complex is a right to purchase the complex or an interest in it from a builder of the complex;
[21] In this case, notwithstanding the transfer of shares, the appellant was the builder of its own multiple unit residential complex. Construction was completed and the first tenants took possession of their rooms on September 1, 1995. Thus, the appellant had completed its construction project as initially planned. At that point, all the conditions required for subsection 191(3) of the Act to apply were met, and the appellant is deemed to have made and received the taxable supply of the building by way of sale on September 1, 1995. It must be recalled that self-assessment is provided for in order to avoid giving a person who is the builder of that person's own construction project any advantage over a person who purchases a residential complex from a builder and is required to pay the GST on the purchase.
[22] The application of subsection 191(3) of the Act in situations of self-supply is not the same as the application of section 206 of the Act. The only common element is the deemed transfer of a taxable supply. The GST paid under subsection 191(3) relates to a GST-exempt supply for which the appellant may not claim an input tax credit since the input tax credit is allowable only on inputs that are required for commercial activities. In 398722 Alberta Ltd. v. Canada, [2000] G.T.C. 4091; [2000] F.C.J. No. 644, the Federal Court of Appeal stated that GST-exempt supplies must be considered separately from supplies made for commercial activities, as follows:
22. Any business may consist of a number of components, each of which is integral to the business as a whole. The definition of "commercial activity" recognizes that possibility but requires, for GST purposes, that any part of the business that consists of making exempt supplies be notionally severed.
[23] The rules set out in section 206 of the Act apply only to a building that is capital property. Subsection 195.1(1) of the Act sets out when a residential complex is deemed to be capital property, as follows:
195.1 (1) Residential complex not capital property - For the purposes of this Part, other than sections 148 and 249, a residential complex shall be deemed not to be, at a particular time, capital property of a builder of the complex unless
(a) at or before the particular time, the construction or substantial renovation of the complex was substantially completed; and
(b) at or after the time the construction or substantial renovation of the complex was substantially completed and at or before the particular time, the builder received an exempt supply of the complex or was deemed under section 191 to have received a taxable supply of the complex.
[24] In this case, if it is assumed that construction was completed in May 1995 and that the building was acquired as a GST-exempt supply, the building was capital property once it was rented as tourist accommodation in May 1995. The rules set out in section 206 would then apply once the building ceased being used for commercial purposes on September 1, 1995, and would apply again once the rental as tourist accommodation resumed on June 1, 1996.
[25] Unlike the situation contemplated in section 197, this case involves a significant change in use.
197. Insignificant changes in use -For the purposes of subsections 206(2), (3) and (5), 207(2) and 208(2) and (3), where in any period
(a) beginning on the later of
(i) the day a registrant last acquired or imported property for use as capital property of the registrant, and
(ii) the day subsection 206(3) or (5), 207(2) or 208(3) last applied to the property, and
(b) ending at any time after that day,
the extent to which the registrant changed the use of the property in commercial activities of the registrant is less than 10% of the total use of the property, the registrant shall be deemed to have used the property throughout that period to the same extent and in the same way as the registrant used the property at the beginning of that period, unless the registrant is an individual who began in that period to use the property primarily for the personal use and enjoyment of the individual or a related individual.
[26] Thus, the application of section 206 makes it possible for the appellant to claim the input tax credit on the purchase of the building in a proportion corresponding to the use of the building for the appellant's commercial activities.
[27] The assessment by the Minister reflects the total GST payable by the appellant, and the GST should be computed under section 191(3) of the Act. For these reasons, the appeal is dismissed.
Signed at Edmundston, New Brunswick, this 20th day of August 2002.
|
"François Angers" |
J.T.C.C.
Translation certified true
on this 26th day of November 2003.
Sophie Debbané, Revisor