Co-author: Liezl Behm, Student-at-Law
The Decision
In Casa Blanca Homes Ltd. v. R.,1 Canada Revenue Agency ("CRA") assessed a GST registrant, Casa Blanca Homes Ltd. ("Casa Blanca"), for not charging, collecting, reporting and accounting for GST on certain deposits (the "Deposits") transferred by Casa Blanca to other parties (the "Assignees"). The Assignees acquired the Deposits as a result of the assignment by Casa Blanca to the Assignees of Casa Blanca's interests in the purchase of real property (vacant lots).
The Tax Court of Canada found that the Deposits transferred to the Assignees were not part of the consideration for the taxable supplies of the real property from Casa Blanca to the Assignees. As the result of each assignment by Casa Blanca to an Assignee, there were two supplies:
- a taxable supply of real property from Casa Blanca to the Assignee (i.e., the taxable supply of a right to purchase real property, a vacant lot); and
- an exempt supply of a financial service of transferring a beneficial interest in the Deposit (a "debt security" and, therefore, a "financial instrument").
As consideration for the taxable supply, the assignment fee (the "Assignment Fee") paid by Casa Blanca to the Assignee attracts GST. Casa Blanca had appropriately charged, collected, reported and accounted for GST on the Assignment Fees.
However, the transfers of the beneficial interests in the Deposits to the Assignees were exempt from GST. Accordingly, the Tax Court allowed the appeal and overturned the GST assessment issued against Casa Blanca by CRA.
The Facts
Casa Blanca entered into numerous purchase agreements ("Agreements") with a property developer (the "Developer"). Under each of these Agreements, on paying a non-refundable Deposit to the Developer, Casa Blanca acquired the right, and assumed the obligation, to purchase a vacant lot in future. Each Deposit constituted security with respect to Casa Blanca's obligation to complete the purchase of the lot, failing which it would be forfeited to the Developer as liquidated damages. Upon completion of the transaction, the Deposit would be applied against the purchase price of the lot.
Casa Blanca subsequently assigned most of these Agreements to the Assignees. To acquire the right to purchase the vacant lots under the Agreements, the Assignees paid:
- i. the Assignment Fee; and
- ii. a sum equal to the Deposit that Casa Blanca had paid to the Developer (the "Deposit Recovery").
Casa Blanca charged and collected GST on the Assignment Fee, but not on the Deposit Recovery.
Issue
At issue before the Tax Court was whether the Deposit Recoveries were subject to GST.
Casa Blanca's Position
Casa Blanca submitted that the Deposit Recovery should not be subject to GST because it was not consideration for acquiring an interest in the real property (i.e., the vacant lot). Rather, the Deposit Recovery was paid to acquire Casa Blanca's beneficial interest in the Deposit held by the Developer.
As a "debt security", the Deposit is a "financial
instrument" under Part IX of the Excise Tax Act (the
"ETA").2 The transfer of ownership of the
financial instrument (i.e., the beneficial interest in the Deposit
held by the Developer) from Casa Blanca to the Assignee was an
exempt supply of a financial service.3
From a policy perspective, Casa Blanca argued that taxing the Deposit Recovery would result in double-taxation imposed against the Assignee (once on the Deposit Recovery and again on applying the Deposit against the purchase price). The first incidence would occur when the Assignee paid the Deposit Recovery to Casa Blanca. The second incidence would occur when the Developer applied the Deposit toward the payment of the purchase price for the vacant lot on behalf of the Assignee. As the Assignees were not registered for the GST and could not claim input tax credits ("ITCs") to recover the GST, the Assignees would bear the costs of GST imposed on the amount of the Deposits twice.
CRA's Position
In contrast to Casa Blanca's approach that Casa Blanca made two separate supplies to the Assignee, (i) an exempt supply of a financial service, and (ii) a taxable supply of an interest in real property, CRA argued that the Deposit Recovery and Assignment Fee together constituted the consideration for the taxable supply of the interest in the real property (i.e, the vacant lot). CRA submitted that this approach did not constitute double-taxation because each incidence of tax occurred on a separate transaction, not a single transaction, the first one between Casa Blanca and the Assignee, and the second one between the Developer and the Assignee. Accordingly, Casa Blanca should have charged, collected and accounted for GST on the entire consideration received for the taxable supply of real property made to the Assignee (both the Assignment Fee and the Deposit Recovery).
Analysis and Conclusions of the Tax Court
In resolving the issue of whether Casa Blanca made:
- i. an exempt supply of a financial service and a taxable supply of an interest in real property to the Assignee, as contended by Casa Blanca, or
- ii. a single taxable supply of an interest in real property to the Assignee, as advocated by the CRA,
the Tax Court applied the principles for determining whether there is a single supply or there are multiple supplies, as established by the leading case of O.A. Brown Ltd. v Canada4 ("OA Brown") and approved by the Supreme Court of Canada in Calgary (City) v Canada.5
As it was possible to structure the transactions such that the Assignee would pay a new Deposit to the Developer to replace the original Deposit released by the Developer to Casa Blanca (but was not structured this way for administrative simplicity), the Deposit Recovery and Assignment Fee were not so inextricably linked so as to be considered related to a single taxable supply of the vacant lot. Rather, each transaction had a sufficiently distinct purpose to be considered separate supplies. In addition to applying the principles from OA Brown, the Tax Court found this interpretation persuasive because it "avoids double taxation, which ... was not intended by Parliament."6
In the alternative, the Tax Court held that the assignment of a Deposit was not really a supply at all, but rather the transfer of an interest in money. A "supply" is defined as the provision of "property" or a "service", which, by definition, exclude "money".7
Practical Implications
This decision is a sensible one. The Deposit Recoveries were intended to compensate Casa Blanca for the Deposits that Casa Blanca had paid to the Developer and then beneficially assigned to the Assignees. As far as Casa Blanca was concerned, cash (the Deposits) was being replaced by other cash (the Deposit Recoveries). As strictly monetary or financial transactions, the Deposit Recoveries paid by the Assignees to Casa Blanca to reimburse the Deposits should not attract GST.
From a policy perspective, no double-taxation would arise on the Deposit amounts. The only incidence of tax would occur when the Deposits were applied against the taxable purchase price of the vacant lots. Double tax would be particularly egregious in these circumstances where the Assignees could not claim ITCs to recover the GST payable, resulting in duplicate tax costs borne by the Assignees. Such a double-up of the tax costs would be particularly burdensome under a HST regime.
By contrast, an Assignment Fee is a premium paid by an Assignee to Casa Blanca (i.e., the assignor) to acquire the right to purchase the vacant lot from the Developer. As such, the Assignment Fee is consideration for a taxable supply and subject to GST. Not only should this case settle what amount of tax an assignor should charge and collect, but in appropriate circumstances, how to calculate the tax to be self-assessed, reported and paid (subject to any ITC and rebate claims to offset the tax paid) by an assignee registered for the GST/HST.8
Although CRA did not appeal this Informal Procedure decision, CRA advises that it does not agree with, and will not apply, the principles enunciated in this decision. CRA stands by its policy established before this decision. In its view, there is only one supply, a taxable sale of an interest in real property, for which the assignee pays to the assignor consideration of the aggregate amount of the deposit, plus the assignment fee.
What CRA's intransigence means is that if an assignor and assignee follow the Casa Blanca Homes decision, then either the assignor or assignee could be assessed for GST/HST imposed on the deposit and may need to be prepared to go to Tax Court to dispute the assessment (to re-litigate the same issue in dispute and resolved in Casa Blanca Homes). Alternatively, to avoid GST/HST imposed on the deposit, the parties could structure the nature of the legal transactions (with appropriate legal documentation) so that the assignee would pay a new deposit to the vendor to replace the assignor's deposit released to the assignor. Stayed tuned, as abiding by the Casa Blanca Homes decision may be insufficient to satisfy the CRA.
It should be noted that the obligations to charge, collect, report and account for GST/HST are not restricted to a GST/HST registrant supplier. A private transaction between a non-registrant assignor and a non-registrant assignee could be subject to GST/HST.9 Where the non-registrant assignor is making a taxable supply of selling an interest in real property to an assignee unregistered for the GST/HST, the assignor would generally be required to report and remit the GST/HST charged and collected with a non-registrant GST/HST return due by the end of the month immediately following the month of the completion of the transaction and payment of the GST/HST on the assignment fee.10
1 [2013] GSTC 128 (TCC, Informal Procedure).
2 Excise Tax Act, (RSC 1985, c. E-15), subsection 123(1).
3 Section 1, Part VII, Schedule V to the ETA.
4 O.A. Brown Ltd. v Canada, [1995] GSTC 40 (TCC).
5 Calgary (City) v Canada, [2012] 1 SCR 689.
6 Supra, footnote 1, paragraph 25.
7 Supra, footnote 2.
8 ETA, subsections 221(2) and 228(4) and (6).
9 A "taxable supply" is a supply made by a person in the course of a "commercial activity" pursuant to subsection 123(1) of the ETA. A supply of real property by way of sale is considered to be made in the course of a "commercial activity" and, therefore, a taxable supply, unless there is a specific exemption in Schedule V of the ETA that applies.
10 ETA, section 221, subsections 238(2) and 245(1). Even if the assignee is registered for the GST/HST, the supplier may be required to charge and collect the GST/HST on the assignment fee because the assignee is an individual acquiring an interest in a "residential complex". Note that a non-resident supplier would generally be relieved from charging and collecting GST/HST pursuant paragraph 221(2)(a) of the ETA, placing the onus on the purchaser (regardless of the purchaser's GST/HST registration status) to self-assess, report and pay the GST/HST directly to CRA.
The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.
© McMillan LLP 2014
