This paper provides a brief legislative and case law update on the Harmonized Sales Tax ("HST") and the Goods and Services Tax ("GST") in the context of real estate transactions. The GST/HST are imposed under the Excise Tax Act (Canada) (the "Act").
A. LEGISLATIVE UPDATE
1. British Columbia
On August 26, 2011, it was announced that 54.73% of British Columbians that had voted in the referendum had voted in favour of replacing the 12% HST with the 5% GST and a 7% Provincial Sales Tax.
The British Columbia government immediately announced that the transition is to occur on April 1, 2013. The transitional rules for the HST have been released and are consistent with similar transitional rules on the introduction of the HST in British Columbia and Ontario. British Columbia enacted the new Provincial Sales Tax Act (British Columbia) on May 31, 2012, but not the regulations thereunder. All exemptions under the old Social Services Tax Act (British Columbia) are to be reproduced in the regulations, which are expected late this fall. Some amendments to the Provincial Sales Tax Act are also expected in advance of April 1, 2013.
In February 2012, it was announced that there would be enhanced new housing rebates for residential real property in British Columbia. As with the existing rebates, the rebates apply to newly constructed or substantially renovated homes purchased or constructed as a place of primary residence. The enhanced rebates apply where the HST becomes payable on or after April 1, 2012 and before April 1, 2013. Eligible purchasers of such homes purchased for a purchase price of up to $850,000 will be entitled to receive a rebate of 71.43% of the 7% provincial component of the HST paid, up to a maximum of $42,500. This is 5 of the 7% provincial component of the HST. The maximum rebate for homes valued at $850,000 or above is $42,500. This enhanced rebate represents a 60% increase in the maximum rebate currently available.
In March 2012, it was announced that British Columbia would provide grants to purchasers of new residential housing that is purchased for use as a secondary or recreational residence. Unlike the enhanced rebates above, British Columbia will provide a grant to purchasers of new residential housing purchased for use as a secondary or recreational residence. The applicable period of April 1, 2012 to before April 1, 2013 is the same. The grant will only be available in a qualifying area of the Province (outside the Capital Regional District and the Greater Vancouver Regional District).
2. Québec
On September 30, 2011, the Québec government announced its agreement with the federal government to more fully harmonize its Québec sales tax ("QST") with the GST/HST. Although the QST is imposed under its own provincial statute and is administered by the Agence du revenu du Québec, the QST has been largely harmonized from the introduction of the GST in the early 1990s. Nonetheless, a few key differences that continued to exist are to be resolved from January 1, 2013.
In particular, QST will be calculated on the selling price of property (and services) without the GST. (QST is currently calculated on the value of the consideration plus the 5% GST.) To correct for the reduced revenues on eliminating the GST from the tax base, the QST rate will be further increased to 9.975% on January 1, 2013.
In addition, there is to be a phase out of the current complete restriction on "large businesses" claiming input tax refunds on: (a) certain road vehicles; (b) electricity, natural gas, fuel and steam; (c) certain telecommunications services; and (d) meals and entertainment. This is to occur over a three year period starting in 2018, thereby bringing to an end a measure that was intended to be "temporary" when first introduced.
Finally, like the other HST Provinces, the Québec government will waive its constitutional exemption on an interim basis and begin paying the GST, which it will be entitled to fully recover by way of a rebate mechanism.
3. Prince Edward Island
On April 18, 2012, it was announced that Prince Edward Island would join the HST regime with a combined HST rate of 14%. This will replace the GST currently levied at 5% rate under the Act, and the revenue tax, a provincial consumption and use tax, which is levied at 10% on the GST-included value of a supply. As in the other HST provinces, the HST in Prince Edward Island will administered by the Canada Revenue Agency.
4. Nova Scotia
On April 2, 2012, it was announced that the HST rate in Nova Scotia would be reduced from the current 15% rate to 14% in 2014, and then to 13% in 2015.
B. CASE LAW UPDATE
There have been a half dozen cases of interest in the past year or so with respect to the GST/HST and real property. In what follows, we consider each of these in turn.
1. Undue Delay in Issuing Invoice
In Lacroix v R, [2011] GSTC 62, the Federal Court of Appeal (the "FCA") considered an assessment by the Minister on the basis that there had been "undue delay" by the Appellant in issuing an invoice for services under a contract for the building of a golf course. The Tax Court of Canada (the "TCC") had held that that the Minister's assessment had been invalid as the work had not been "substantially completed".
Subsection 168(1) of the Act provides that GST/HST in respect of a taxable supply is payable on the earlier of the day the consideration for the supply is paid and the day the consideration for the supply "becomes due". In that respect, subsection 152(1) of the Act specifies that the consideration "shall be deemed to become due" on the earliest of three dates:
- the day the supplier first issues an invoice or the invoice's date;
- the "day the supplier would have, but for undue delay, issued an invoice in respect of the supply for that consideration" [underlining added];
- the day the recipient is required to pay that consideration to the supplier pursuant to an agreement in writing.
However, paragraph 168(3)(c) of the Act sets out a rule whereby GST/HST is payable when, under an agreement in writing for the construction, renovation or alteration of, or repair to any real property "the construction, renovation, alteration or repair is substantially completed".
By the time the Appellant stopped work on the golf course, due to an illness on the part of one of the principals of the recipient of the services, the work had been 55% completed. There had been no written agreement for the services and no invoice had been issued. To protect its right to be paid, the Appellant registered a "legal hypothec" on the property, which is akin to a construction lien in common law provinces under Quebec's Civil Code).
The FCA held that the TCC could not conclude the analysis by determining that the work had not been substantially completed, because it was not apparent to the FCA that paragraph 168(3)(c) applied given that the express wording of that provision requires "an agreement in writing". The FCA held that the TCC, therefore, had to determine whether, according to the evidence, an invoice had to be issued for the purpose of paragraph 152(1)(b) of the Act for the part of the work that had been carried out.
The FCA concluded that there had been "undue delay" in the Appellant issuing an invoice based on the evidence. First, the FCA accepted the Minister's position that the contractual relationship ended between the halting of the work and the filing of the hypothec. The FCA held:
Logically, an invoice for the outstanding amount had to be issued before the motion for forced surrender and for taking in payment was filed. In fact, this motion could not be filed before a request for payment was made in some form or other. In this context, the failure to issue an invoice cannot be justified.
This is the first case in which the FCA has considered the meaning of "undue delay". It is worth considering the context of any significant delay in the issuance of an invoice in an on-going construction contract.
2. GST Transitional Rebate
In Henderson v R, [2011] GSTC 4, the TCC considered the transitional GST rebate under its Informal Procedure in respect of an Appellant that wished to acquire a new, yet to be constructed, house. The Appellant entered into a construction contract for the building of a home on a particular lot. There was a term of the contract in the payment schedule which provided that the Appellant was to pay "$132,500 plus GST...to purchase lot by June 28, 2007". The Appellant paid the amount to the contractor and title to the lot was transferred from the registered owner (a party different than the contractor) to the Appellant in August 2007. Construction of the home took place in 2007 and 2008 and the Appellant took possession in 2008.
The Appellant applied for the GST transitional rebate pursuant to subsection 256.74(5) of the Act. The rebate is for 1% where GST was paid at 6% on a residential purchase that closed on or after January 1, 2008, the date on which the GST rate went from 6% to 5%. The provision requires the agreement of purchase and sale to have been signed before October 31, 2007, that is, prior to the announced reduction in the GST rate. The policy behind the rebate was to provide the rebate to the consumer, since industry practice is to price new homes on a GST-included basis.
The TCC held that the Appellant failed to meet two conditions in section 256.74. First, the contract between the Appellant and the contractor was not a contract for the purchase of a house. It was a contract for the construction of a house on a lot which the contractor also sold to the Appellant before the start of construction. Second, the Appellant acquired ownership to the lot and part of the construction in 2007, not 2008. As a result the requirement that ownership and possession of the residential complex be transferred after 2007 were not met.
The legal difference between buying a newly constructed home vs. buying a lot and entering into a contract with the vendor to build a new home resulted in the 1% GST rebate being unavailable to the Appellant.
In a further Informal Procedure appeal, in Lavigne v R, [2011] GSTC 122, the TCC once again considered the application of section 256.74 of the Act. In this case, the Minister had denied the rebate on the basis the Appellant took possession of her condominium unit before January 1, 2008.
The wording at issue was in paragraph 256.74(5)(a) which requires that there be a sale of a residential complex "in respect of which ownership and possession under the agreement are transferred to the particular individual on or after January 1, 2008".
The Appellant had moved into the newly completed condominium in November 2007 as the unit was substantially completed and liveable. However, it was not until March 2008 that the Appellant signed a notarized contract of sale and purchase of the condominium and paid the purchase price. Under this contract, the Appellant became the owner on the date of that contract with immediate possession and occupation. The Appellant argued that she had moved into the condominium only as a tenant with permission of the contractor on the condition that she pay for electricity, and that she therefore had neither ownership or possession within the meaning of the Act.
The TCC noted that the Act does not define either "possession" or "ownership". Notwithstanding that the condominium was in Quebec, the TCC held that the term "possession" must be given its common-law meaning and, as a consequence, mean something different from "ownership". Specifically, in this context it should mean "occupation" or "detention". Accordingly, the appeal was denied.
3. Rental Property and New Housing Rebate
In Wotherspoon v R, [2011] GSTC 108 (TCC), the Appellant purchased a condominium for his personal use as a residence and paid GST in 2007. The vendors were GST registered and had previously purchased the condominium as an investment property to rent out on a short term basis. The vendors had claimed input tax credits on the purchase and collected GST on the rental income.
The Appellant claimed and received the New Housing Rebate. The Appellant then claimed a rebate for tax paid in error in respect of the remaining GST paid to the vendors on the basis that this was a GST-exempt supply of a used "residential complex". The Minister denied this second rebate for tax paid in error.
The TCC held that the condominium did not comply with the definition of "residential complex" set out in subsection 123(1) of the Act because all, or substantially all, of the use by the vendors was as a rental property for periods of time of less than the 60 days as referred to in the postamble to the definition, which provides:
but does 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.
According to the evidence, the rental periods were of a short duration, generally seven to ten days. Accordingly, the appeal was denied.
4. Primarily as a Place of Residence
In Coates v R, [2011] GSTC 21, the Appellant was an employee of a construction company, who had personally built three houses, moved into each in turn and then sold each thereafter. He went on to build the home that he currently resides in. All four houses are on the same street. The Appellant was not GST/HST registered. The Appellant testified that he built the third house, which was the subject of the appeal, for the sole purpose of occupying it as his home. When he built the house, he had two children and a third child arrived after the house was completed. His testimony was that his employment was intermittent and that he had difficulty paying interest and other borrowing costs on personal debt and meeting other living expenses. He used the proceeds from the sale that took place six months later to repay debt, finance the purchase of the land on which he built his current home, and to pay personal living expenses.
The TCC held that the pattern adopted by the Appellant showed that the Appellant built the third home with, at least, the secondary intention of selling it, as he had done with the previous two properties. On this basis, the TCC concluded that the Appellant had constructed the third home in the course of an adventure or concern in the nature of trade. Accordingly, although the Appellant was an individual, he was considered to be a "builder" within the meaning of the Act.
As a builder, the Appellant was required to self-assess for HST on the fair market value of the home on the substantial completion of the construction or on moving in pursuant to subsection 191(1) of the Act. At issue in the appeal was whether an exception for personal use would apply to exempt the Appellant from this requirement. The exemption at subsection 191(5) of the Act is as follows:
Subsections (1) to (4) do not apply to a builder of a residential complex or an addition to a residential complex where
- the builder is an individual;
- at any time after the construction or renovation of the complex or addition is substantially completed, the complex is used primarily as a place of residence for the individual ...
- the complex is not used primarily for any other purpose between the time the construction or renovation is substantially completed and that time; and
- the individual has not claimed an input tax credit in respect of the acquisition of or an improvement to the complex [underlining added].
The TCC held that the wording of subsection 191(5) of the Act:
requires that the property actually be used first by the individual (who is a builder as defined) as a place of residence. That involves a simple factual determination as to whether or not the property was used as a family home after it was substantially completed. A secondary intention to resell the property at a later date is irrelevant to the determination as to whether or not the exception applies.
By definition, an individual is a builder only if the property was built in the course of a business or an adventure in the nature of trade. If the home was constructed by the individual purely for personal reasons, the "self-supply" rule does not apply in the first instance. The exception only comes into play after an individual has been found to be a builder. Therefore, the exception cannot be interpreted as requiring that the property have been built only for purely personal reasons. This means that an individual can benefit from the exception even if he has the secondary intention, at the time of its construction, of reselling the property, provided he actually uses it as a place of residence after the construction is completed.
Applying this reasoning to the evidence, the TCC noted that the Appellant and his family had lived in the home for almost two years after completion, there is no evidence to show that the Appellant listed the home for sale after it was substantially completed or showed it to prospective buyers, did not hold it as stock-in-trade and the use of the property was only changed later on when the Appellant ran out of money and needed to sell the home to meet his family's living expenses.
On this basis, the TCC concluded that the exception in subsection 191(5) applied. The TCC did not refer to a line of case law, including the decision of the FCA in Lacina v R, [1997] GSTC 69, in which the FCA held that "the word 'primarily' refers to a personal intention to live there permanently and not to use the property as stock-in-trade or, in other words, as a disposable asset". It is difficult to reconcile this decision with the earlier case law.
5. Place of Residence
Finally, in Daruwala v. R, [2012] GSTC 69, the Appellant purchased a new home from a builder and paid the GST. When the Appellant first viewed the home, it appeared to him that it had been lived in, as there was some furniture, and there was some garbage in the kitchen. He raised his concerns about GST being payable on a used home, but he was told by the builder that the tax had to be paid. After taking possession the Appellant noticed burn damage on the roof of the oven. Mail for the builder and the principal's family was received at the home.
The Appellants filed for a rebate of the GST on the basis that the home had previously been occupied.
The TCC considered whether the self-supply rule in subsection 191(1) applied on the basis that the builder had given "possession or use ... under a lease, license or similar arrangement .... entered into for the purpose of its occupancy by an individual as a place of residence". Although the arrangement between the builder and its principal was informal, the TCC concluded there had been a "lease, license or similar arrangement" for the principal to use the home.
The TCC went on to consider whether the home was being used as a "place of residence", even temporarily. The TCC did not find the testimony of the principal to be sufficiently detailed or cogent to be persuasive. The TCC held that in the absence of reliable evidence as to the purpose for which the home was to be occupied, it concluded that the principal intended to use the home as his home for at least several months, which was sufficient to satisfy the requirements of subsection 191(1).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
