http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/111473/index.do
703008 B.C. Ltd. v. The Queen (August 20, 2015 – 2015 TCC 208, D’Arcy J.).
Précis: The appellant constructed a number of condo units. As an innovative financing technique the units were initially leased to purchasers who had an option to purchase them. The appellant collected GST from the lessees. CRA disagreed and taxed the appellant on its self-supply of the property for rental purposes ($599,605.34). The appellant appealed to the Tax Court.
The Tax Court held that the transactions were leases - form matters in tax cases. As such there was a self-supply and the appellant was liable for the disputed GST. The appeal was dismissed with costs.
Decision: The condos in question were marketed with a novel financing strategy:
[5] The Appellant is a real estate development company based in Kelowna, British Columbia. One of its projects was a condominium development in Kelowna known as Terravita. The project as planned by the Appellant was to consist of four private gated condominium buildings.
[6] Between September 2007 and August 30, 2009, the Appellant constructed three of the four Terravita condominium buildings. The first condominium unit was available for occupancy around July 2008.
[7] It appears that the Appellant began to market the Terravita project in March of 2007. It retained Tactx to market and sell the condominium units in the Terravita project (the “Terravita Condo Unit(s)”).
[8] Mr. Bird testified that the Appellant wanted to sell the Terravita Condo Units as quickly as possible in order to pay down the $33 million loan the Royal Bank had provided to finance the construction of the project. In order to accomplish this goal in a very competitive real estate market, it implemented a financing program referred to as the Terra-Living Financing Program (the “Financing Program”). Mr. Bird described the Financing Program as an interest- only financing plan, nominally on $100,000
[9] The witnesses described the program using the example of a Terravita Condo Unit with a $400,000 fair market value, where the Appellant’s customer wished to use the Financing Program for $100,000 of the $400,000 fair market value. In such a situation, the program worked as follows:
• The Appellant and its customer entered into an offer to lease agreement (the “Offer to Lease”).
• The Offer to Lease provided for the following:
• An offer to lease the Terravita condo unit for a 99-year term.
• A monthly lease payment ($333.33 in the example) for the first three years of the lease. This amount was calculated as the interest payable on a specific amount ($100,000 in the example) financed at 4% (the “Monthly Lease Payment”).
• A prepaid lease payment ($300,000 in the example), paid on the closing of the transaction (the “Closing Date”), equal to the difference between the fair market value of the condominium ($400,000 in the example) and the amount used to calculate the Monthly Lease Payment ($100,000 in the example) (the “Prepaid Lease Payment”).
• An option for the Appellant’s customer to purchase the condominium (the “Purchase Option”) for an amount which was set at three hundred times the Monthly Lease Payment (the $100,000 used to calculate the Monthly Lease Payment).
[10] Before taking possession of a Terravita condo unit, the Appellant’s customer signed a lease, which is referred to as the “Express Charge Terms Form of Lease” (the “Condo Lease”).
[11] The Royal Bank and the Valley First Credit Union provided financing to customers in respect of the Prepaid Lease Payments. Ms. Bold described it as financing involving a lease component. Mr. Bird agreed that the customers granted the Royal Bank a mortgage of lease.
[12] Ms. Bold and Mr. Bird, using the example referred to above, described the financial benefits of the Financing Program. Ms. Bold noted that the Appellant’s customer’s monthly cash outflow was reduced since he/she only paid interest on the $100,000 used to calculate the Monthly Lease Payment.
[13] She explained that the Financing Program also reduced the amount of the down payment required by the Royal Bank. If the customer simply purchased a Terravita Condo Unit for $400,000, then the Royal Bank could provide 80% financing on the $400,000, resulting in an $80,000 down payment. However, under the Financing Program the Royal Bank could finance up to 95% of a $300,000 Prepaid Lease Payment if the customer intended to live in the condominium, resulting in a down payment of $15,000. If the customer intended to rent the condominium to a third party, then the Royal Bank could finance up to 80% of a $300,000 Prepaid Lease Payment, resulting in a down payment of $60,000.
[Footnotes omitted]
CRA took the position that under the lease arrangements there was a self-supply by the appellant of the condos which gave rise to significant GST liability:
[20] The Minister assessed the Appellant additional net tax for the Assessed Period consisting of GST of $599,605.34 deemed to be collectable on a deemed self-supply of the 44 Terravita Condo Units, assessed GST collected but not reported of $11,499.95, and disallowed the credits of $36,189.02 claimed in respect of the subsection 254(2) new housing rebate.
[21] The Appellant accepts that it is liable for the $11,499.95 of GST collected but not reported, but does not agree with the other adjustments. It is the Appellant’s position that the supply of the 44 Terravita Condo Units pursuant to the Offer to Lease and the Condo Lease was not subject to the so-called self‑supply rules because the Appellant supplied these units by way of “sale” and not by way of “lease, licence or similar arrangement”.
[Footnote omitted]
The Court agreed with CRA’s position:
[70] Counsel for the Appellant also argued that it is not in every situation that an option results in a sale. However, he argued, such is the result in the fact situation before the Court, primarily because all of the recipients intend to exercise the option to purchase prior to the expiry of the 99-year term. For the reasons just stated, I do not accept his argument.
[71] In addition, as this Court has noted on numerous occasions, the form of the transaction matters. In Friedberg v. Minister of National Revenue (1991), 135 N.R. 61, the Federal Court of Appeal stated at paragraph 4:
In tax law, form matters. A mere subjective intention, here as elsewhere in the tax field, is not by itself sufficient to alter the characterization of a transaction for tax purposes. If a taxpayer arranges his affairs in certain formal ways, enormous tax advantages can be obtained, even though the main reason for these arrangements may be to save tax (see Irving Oil Ltd. v. Minister of National Revenue (1991), 126 N.R. 47; 91 D.T.C. 5106, per Mahoney, J.A.). If a taxpayer fails to take the correct formal steps, however, tax may have to be paid. If this were not so, Revenue Canada and the courts would be engaged in endless exercises to determine the true intentions behind certain transactions. Taxpayers and the Crown would seek to restructure dealings after the fact so as to take advantage of the tax law or to make taxpayers pay tax that they might otherwise not have to pay. While evidence of intention may be used by the courts on occasion to clarify dealings, it is rarely determinative. In sum, evidence of subjective intention cannot be used to “correct” documents which clearly point in a particular direction.
[72] If I were to find that the recipient’s intention determined the taxation of the supply, then the supplier, the Canada Revenue Agency and the Court would be engaged in endless exercises to determine such intention. This would place a particularly harsh burden on the supplier.
The appellant could not rely upon the exclusion to the self-supply rule dealing with sales:
[80] The Appellant also argued that, even if the supply was by way of lease, the subsection 191(1) self-supply rules did not apply to the supply as a result of the exclusion in subparagraph 191(1)(b)(i).
[81] That subparagraph provides that the self-supply rules will only apply if the builder of the complex (the Appellant) gives possession or use of the complex to a particular person under a lease, licence or similar arrangement entered into for the purpose of its occupancy by an individual as a place of residence, “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” (Emphasis added).
[82] The exclusion only applies if possession is given under or as a consequence of an agreement of purchase and sale and if the possession only lasts until ownership of the complex is transferred to the purchaser under the agreement of purchase and sale. Similarly to the timing rules in subsection 168(5), this provision recognizes the situation where the supplier provides the recipient with possession of the condominium but cannot transfer ownership until some future date when the condominium is registered under the applicable provincial law as a condominium. In effect, it ensures that the self-supply rules do not apply to a sale of a condominium.
[83] The exclusion does not apply to the supply by the Appellant of the 44 Terravita Condo Units. Possession of the individual units was not given to the Appellant’s customers under or as a consequence of an agreement of purchase and sale. There was no agreement of purchase and sale. The only agreement relating to the Appellant’s customers’ possession of the condominium units was the Condo Lease, which was a lease not an agreement of purchase and sale.
Accordingly the appeal was dismissed with costs.