Source: https://taxinterpretations.com/content/449794
Timestamp: 2019-04-21 14:44:31+00:00

Document:
Heard at Vancouver, British Columbia, on March 6, 2003.
Judgment delivered at Ottawa, Ontario, on April 29, 2003.
REASONS FOR JUDGMENT BY: MALONE J.A.
CONCURRED IN BY: STRAYER J.A.
 The central issue in this application for judicial review is whether certain conveyances by Polygon Southampton Development Ltd. (Polygon) to purchasers of new residential condominium units are subject to the self-supply rules in subsection 191(1) of the Excise Tax Act, as amended, R.S. 1985, c. E-15 (the Act). If Polygon is not subject to the self-supply rules, and the new housing rebates (NHR) available to the purchasers were consequently under-calculated, a collateral issue is whether Polygon, as the builder, is now entitled to that portion of the rebates not yet claimed by the purchasers.
 The learned Tax Court Judge (Judge) allowed an appeal by Polygon from the Minister of National Revenue's assessment of goods and services tax (GST) with respect to these units. The Judge determined that the self-supply rules under subsection 191(1) did not apply, that the disposition of the units by Polygon was a non-exempt taxable supply, and that NHRs could be claimed on the full purchase price pursuant to subsection 254(2) of the Act. The decision is reported at  G.S.T.C. 17.
 The Tax Court's decision turns exclusively on questions of law, and was rendered under the informal procedure as established under section 18.3001 of the Tax Court of Canada Act, R.S. 1985 c. T-2. My review is conducted on a standard of correctness (Metropolitan Toronto Hockey League v. Canada,  G.S.T.C. 31;  F.C.J. No. 944).
 Polygon is a "builder" for GST purposes, registered under Part IX of the Act. In the period 1996 to 2000, its primary business was the development of new residential condominium units on land leased from the City of Vancouver under a ground lease. This ground lease and any improvements made by Polygon on the land were subject to Part 3 of British Columbia's Condominium Act, R.S.B.C. 1996, c. 64 [now repealed] (Condominium Act), which regulated the development of condominiums on land leased from governments or public authorities.
95. Despite sections 2 and 3, on deposit of a leasehold strata plan, the registrar must register new indefeasible titles to the owner in fee simple of the land included in the strata plan for each of the lots shown on the plan as may be necessary.
96. (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 government 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.
(5) Every assignee of an owner developer's interest as strata lot lessee in a strata lot is deemed to have covenanted and agreed in writing with the government or other lessor to observe and perform all of the terms and conditions contained in the model strata lot lease, but is not, despite 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.
97. (1) The government or other lessor must purchase the strata lot lessee's interest in the strata lot on the termination of the strata lot lease.
(b) if none, the fair market value of the lessee's interest in the strata lot evaluated as if the lease did not expire.
(3) The government or other lessor under the strata lot may, if the strata corporation consents by unanimous resolution, change the basis of calculation of the purchase price of the strata lots set out in the schedule, and must file the amended schedule with the registrar.
(4) Unless otherwise expressly provided in the strata lot lease or agreed in writing by the government or other lessor and the strata lot lessee, if the government or other lessor and the strata lot lessee have failed to agree on the purchase price under subsection (2) (b), 30 days before the date of termination on expiry or 30 days after the date of termination under section 109 (2), the purchase price under subsection (2) (b) must be determined by arbitration under the Commercial Arbitration Act.
98. If, on a strata lot lessee's default in observing and performing his or her obligations under the strata lot lease, the government or other lessor becomes entitled to re-enter and take possession of the strata lot, the government or other lessor must not, despite any agreement or enactment to the contrary, re-enter, take possession of the strata lot or otherwise cause the strata lot lease to be terminated, but may apply to the court for an order for sale.
 In order to comply with the above provisions, Polygon filed a strata plan that subdivided the leased land into individual strata lots. New certificates of title were then issued to the City of Vancouver as lessor for each of the lots shown on that plan. The original ground lease was also converted into individual strata lot leases in the name of Polygon as lessee. Each strata lot lease incorporated the terms of a model strata lot lease referred to in the ground lease. All of the leases run for a period of 99 years.
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 under the contract is stated as a single amount and is not allocated between the buildings and land components of the strata lot.
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.
 Under subparagraph 191(1)(b)(i) and 191(1)(b)(iii) of the Act, when a builder builds a new condominium unit, and leases or occupies that unit, the self-supply rules deem the builder to have sold the unit to himself or herself, and GST is thus payable by the builder on the fair market value of the unit. Under 191(1)(b)(ii), the rule also applies when a builder sells a new building and leases land associated with the building, or assigns a lease of that land.
e) avoir payé à titre d'acquéreur et perçu à titre de fournisseur, au dernier en date de ces jours, la taxe relative à la fourniture, calculée sur la juste valeur marchande de l'immeuble ce jour-là.
 In calculating the NHRs available to purchasers of its condominium units, Polygon instituted an internal practice of allocating the purchase price between the land and the buildings, with 76% ascribed to the buildings, and 24% to the land. Pursuant to section 254.1, which applies when a builder self-supplies under subparagraph 191(1)(b)(ii), NHRs were claimed on only the building portion of the purchase price. Polygon credited amounts to its purchasers, and deducted amounts from its collectible GST, in accordance with this allocation (all provisions relevant to the NHR regime are reproduced at paragraph 41 of these reasons).
 By notice dated January 4, 2000, the Minister assessed Polygon, determining that, for the purposes of calculating the NHRs, it was proper to allocate 32.5% of the purchase price of the condominium units to the land, not 24%. Polygon objected, and this part of the assessment was eventually withdrawn by the Minister. However, the Minister did not agree with the additional objection raised by Polygon that Polygon was not obliged to self-supply, and therefore the NHRs should have been calculated on 100% of the purchase price pursuant to subsection 254(2) of the Act.
 Polygon then appealed the Minister's decision to the Tax Court of Canada.
 The Judge concluded that the self-supply rules did not apply because each of the transactions by which Polygon's interest in a 99 year lease was transferred to a buyer was not an assignment of a lease but, in his words, "more in the nature of a sale for purposes of the [Excise Tax] Act" (paragraph 45 of his reasons). From that, he reasoned that each transaction was a taxable sale, and the self-supply rules did not apply. The effect of this conclusion on the NHRs was that subsection 254(2) applied, and not section 254.1, which meant that NHRs could be claimed on 100% of the purchase price. Since the rebate credited to purchasers by Polygon was based on only the building portion of the purchase price, Polygon had under-calculated the rebate, and had, in effect, remitted too much GST to the Minister.
 The final issue decided by the Judge was whether Polygon or the purchasers were entitled to the unclaimed rebate. The Judge noted that, generally speaking, the Act stipulates that the rebate belongs to the purchaser. However, in this situation, the purchaser agreed to let Polygon credit the NHR towards the purchase price. Accordingly, section 234 enables Polygon to deduct from its calculation of the net GST an amount equal to the credit. Since the purchasers can look to Polygon to be credited with the correct amount, the Judge concluded that Polygon ought to be able to look to the Minister to obtain the extra credit or rebate.
 In conducting this analysis, I am guided by two imperatives. First, like the Income Tax Act, the Excise Tax Act is a complex statute in which many competing principles and interests have been balanced by Parliament. The Supreme Court of Canada has repeatedly warned that courts must be cautious in finding an unexpressed legislative intention within the clear provisions of a taxing statute (see Shell Canada Ltd. v. Canada,  3 S.C.R. 622 at paragraph 43). Secondly, I must examine the true nature of the transactions with reference to the Condominium Act, the underlying documents and any other applicable legal principles in order to determine its tax consequences (see Hidden Valley Golf Resort Association, v. The Queen,  G.S.T.C. 42 (F.C.A.)).
 The first issue to be decided is whether the self-supply rules, pursuant to paragraph 191(1)(b), apply to these transactions between Polygon and the purchasers. The key question is whether these transactions are leases, leases akin to sales, single assignments of leasehold interests, or leases of the land combined with sales of the buildings. Based on the Condominium Act, the wording of the purchase agreements, and other policy considerations, the judge concluded that the self-supply rules did not apply. In his analysis, the leasehold interest being conveyed was akin to the sale of a freehold interest, and thus did not qualify as an assignment of a lease under subparagraph 191(1)(b)(ii). The Judge did not explicitly state whether he thought ownership of the buildings was conveyed in a manner distinct from the ownership of the land.
 While I agree with the judge's conclusion that the self-supply rules do not apply, I reach this conclusion for different reasons. In my view, the conveyance at issue here qualifies as a single taxable supply, not because it is akin to a sale of an interest in fee simple, but because in this case there is no separate sale of the building that is distinct from the assignment of a lease of the land on which the building is located.
 In the earlier decision of Taylor v. Canada,  T.C.J. No. 617 (Taylor), the Tax Court of Canada addressed this same self-supply issue. The relevant facts surrounding the transactions in Taylor and in this application are materially indistinguishable. In Taylor, the learned Tax Court judge held that the conveyance of a condominium built on land leased from a public authority ought to be characterized as a lease of the land combined with the sale of the building, and therefore, pursuant to subparagraph 191(1)(b)(ii), the self supply rules applied. For the reasons which follow, I also disagree with that conclusion.
 Before examining the specific issues in dispute, I shall first provide an overview of how GST applies to sales of new homes or condominiums, and how the complex self-supply rules contrast with the general scheme. Section 165 of the Act requires recipients of a taxable supply to pay tax equivalent to 7% of the value of the consideration. 'Supply' is defined in subsection 123(4) as "the provision of property or a service in any manner, including sale, transfer, barter, exchange, licence, rental, lease, gift or disposition". That subsection also defines "real property" to include ". . . lands and tenements of every nature and description and every estate or interest in real property, whether legal or equitable." Hence, a leasehold interest is property within subsection 123(1). The term 'sale' is also defined to include "any transfer of the ownership of the property and a transfer of the possession of the property under an agreement to transfer ownership of the property." Exempt supplies, which are not subject to GST, are defined as those supplies that are listed in Schedule V of the Act.
 The sale of a new home by a builder will normally be a taxable supply and thus subject to GST calculated as 7% of the purchase price. However, subsection 254(2) of the Act provides a partial rebate of GST in certain situations where a new home is purchased from a builder. This new housing rebate is equal to 36% of the GST paid on the full purchase price of the home, although it is capped at $8750, and is gradually phased out for homes priced at more than $350,000 and is unavailable for homes over $450,000. A resale of a home is generally exempt from GST pursuant to section 2 in Part I of Schedule V of the Act.
 In my analysis, these rules for new homes were implemented in order to create a level playing field as between builder lessors and non-builder lessors, as well as between builder occupiers and non-builder occupiers. As noted above, when a builder builds a new home and sells it, GST is payable on the sale. Thus, a non-builder who wants to purchase a new home and lease it to another person, or occupy it himself, would have to pay GST on his purchase. Hence, absent the self-supply rules, a builder who leases or occupies a new home would have a competitive advantage over the non-builder through the realization of tax savings, as such occupation would not create a taxable supply, and the lease of the home to another would be exempt from GST, as residential leases are exempt under Schedule V, Part 1, section 6. Similarly, a builder who sells the building but leases the underlying land could also realise tax savings, because the lease of the land would be exempt under section 7 of Part I of Schedule V. Another purpose of these provisions is to ensure that a new home is taxed at its full fair market value as soon as it is occupied as a new home, so that a lease or personal occupancy cannot postpone or exempt the application of the GST.
 Where a builder is subject to the self-supply rules, the Act also ensures that any subsequent conveyance to a purchaser is exempt from GST. An amendment to the Act was specifically made to make the building portion of a supply by way of a combined sale of the building and lease of the land tax exempt to the subsequent purchaser (see sections 3, 4, and 5.1 of Part I of Schedule V of the Act).
 A side effect of these self-supply rules is that subsequent purchasers are no longer paying GST on the purchase of the home, and are thus no longer eligible to claim new housing rebates under section 254. This was a particular problem for the type of conveyance contemplated by section 191(1)(b)(ii), because the builder, who paid the GST, would simply pass this cost on to the subsequent purchaser by including it in the price of the leased land and the building. Thus, section 254.1 was enacted to provide for NHRs to purchasers even where the builder has self-supplied on a disposition of a new home by way of combined sale and lease. Under that section, however, if the fair market value of the home and the land is not more than $374,500, the rebate will be only 2.34% of the total consideration paid for the home. Above that price the rebate is gradually phased out. Without section 254.1, the purchaser would have effectively paid the GST on a new home, but, unlike other new home buyers, received no rebate.
 With this explanation of the scheme established by the self-supply rules, I now turn to an examination of the precise nature of the supply by Polygon to each of the purchasers.
Was there a sale of part of the building?
 Polygon's interest in the ground lease was that of a lessee; the City of Vancouver having retained the fee simple interest. The ground lease contemplates at section 15.02 the assignment of Polygon's interest in that lease to assignees who covenant directly with the City of Vancouver, and who agree to be bound by all of Polygon's obligations under both the ground lease and the model strata lot lease. All Polygon could dispose of was its interest in the ground lease and the model strata lot lease, and Polygon could only supply the condominium units by way of assignment of its leasehold interest.
 Even though the City of Vancouver was a signatory to the sale of the leasehold interest from Polygon to the final purchaser, and thereby consented to the assignment, there is nothing in the contract of purchase and sale that changes the nature of the transaction. The essence of these transactions, then, is that the City of Vancouver leased unimproved land to Polygon for the express purpose of the construction of new residential condominium units. These units were to be occupied by the purchasers for the balance of the term of the ground lease.
In consideration of the sum of $249,000.00 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.
 It is a basic principle of real estate law that a chattel, such as a building, affixed to land is presumed to be a fixture, and is part of the land to be conveyed. There are, however, situations where this presumption can be rebutted, and where a tenant can reclaim certain fixtures (see Ziff, B., Principles of Property Law, 2nd ed., (Carswell: Scarborough, 1996) at 100-103). However, there is nothing in this assignment that reserves such rights to these purchasers. Polygon simply conveyed its leasehold interest without restriction, and the ownership of the land and building remained with the City of Vancouver. In my analysis, this is not a sale of a separate ownership interest in the home coupled with a lease.
 In my view, to be characterized as a sale of a separate ownership interest in a home coupled with a lease of the underlying land, this precise situation would have to be specified in the transaction documents. The starting point in real estate transactions is that the ownership of a building follows the land, and this premise would have to be clearly dislodged in the agreements. Here, the documents do not create such an exception. In my view, nor do they in Taylor. The reference to the 'Home' in the contracts of purchase and sale to the purchasers in Taylor is not sufficient.
Was there an assignment of a lease?
 There is considerable support in the documentary evidence for the conclusion that these transactions were simply assignments of leasehold interests. For example, only one sum is paid for the assignment of the lease, and none of the sales contracts separated the consideration paid for the land and the buildings. As well, the sales contracts all indicated that only the unexpired term of the lease was being assigned. It is also noteworthy that there is nothing in the ground lease to suggest that the City contracted to give Polygon any type of distinct or unqualified ownership interest in the condominium units; rather, the ground lease only requires Polygon to construct the improvements.
 The strata lot leases are also instructive. Section 21.01 explicitly states that upon expiry of the lease, the purchaser may be required by the City to vacate the premises, while ensuring that the building is left in proper condition. Section 22.02 allows the purchaser to remove only the usual tenant fixtures which are not a part of the buildings or the lands. These requirements are surely not indicia that the purchaser has an unqualified ownership of any part of the building.
 Section 96(1) of the Condominium Act is also of assistance. It provides that the deposit of the leasehold strata plan for registration in the land title office "operates as a conversion of the registered ground lease into individual leases in the name of the owner developer of the interest . . . in each strata lot, including its share of common property." Each of these individual leases can then be assigned to a purchaser. No freehold interests are created.
 Finally, the actual documents filed pursuant to the B.C. Land Title Act, RSBC 1996 c. 250 indicate a lease to Polygon from the City, and an assignment of that lease from Polygon to the purchaser. No separate ownership interest in the building is registered to the purchaser.
 On the basis of these documents and the provincial legislation, the supply of these residential condominium units constructed on land leased from the City of Vancouver can only be viewed as a single transaction; namely the assignment of the leasehold interest in the land, and the accompanying fixtures, which includes the buildings.
 An assignment of a leasehold interest in land with its buildings is not within paragraph 191(1)(b). In particular, it is not within subparagraph 191(1)(b)(i), which applies to "a lease, licence or similar arrangement," but does not apply to an assignment of a lease. If subparagraph 191(1)(b)(i) were meant to include an assignment of a lease, it would have said so explicitly, as in clause 191(1)(b)(ii)(B).
 It follows that the assignment of these leasehold interests is a taxable supply to the purchasers, as Polygon is not deemed to self-supply in accordance with the provisions of paragraph 191(1)(b) of the Act, and the assignment of a lease is not an exempt supply under section 5.1 of Part I of Schedule V of the Act. Polygon is accordingly required to collect GST pursuant to subsection 221(1). Since Polygon originally structured its agreements with purchasers on the assumption that the self-supply rules did in fact apply, the purchasers in this case did not pay GST, as would have been necessary under my interpretation. Section 194 of the Act provides, in a case such as this, where purchasers have been erroneously told by a builder that their purchase is GST exempt, to deem the purchase price to have included GST, and to deem that GST to have been collected by the builder. This deeming rule is presumably not a problem for Polygon as it had already assessed and reported GST on the disposition of the condominiums under the self-supply provisions.
 The outcome of my analysis is also consistent with the purpose of the self-supply rules, as described above. In these cases, the full GST cost on the purchase price of a 99-year pre-paid condominium lease is passed on to the purchaser. There is no advantage to Polygon vis-à-vis a third party who wanted to engage in a similar transaction. Further, the GST payable on the new home will not be postponed or avoided.
On what basis should the NHRs be calculated and paid?
 I turn then to the collateral issue of the NHRs; the new housing rebates. Since Polygon is not subject to the self-supply rules on these transactions, the purchasers are taxable on the full purchase price and entitled to rebates calculated on the amount in accordance with subsection 254(2).
234. (1) If, in the circumstances described in subsection 252.41(2), 254(4), 254.1(4) or 258.1(3), a particular person pays to or credits in favour of another person an amount on account of a rebate and transmits the application of the other person for the rebate to the Minister in accordance with subsection 252.41(2), 254(5), 254.1(5) or 258.1(4), as the case requires, the particular person may deduct the amount in determining the net tax of the particular person for the reporting period in which the amount is paid or credited.
234. (1) La personne qui, dans les circonstances visées aux paragraphes 252.41(2), 254(4), 254.1(4) ou 258.1(3), verse à une autre personne, ou porte à son crédit, un montant au titre d'un remboursement et qui transmet la demande de remboursement de l'autre personne au ministre conformément aux paragraphes 252.41(2), 254(5), 254.1(5) ou 258.1(4) peut déduire ce montant dans le calcul de sa taxe nette pour la période de déclaration au cours de laquelle le montant est versé à l'autre personne ou porté à son crédit.
254. (1) Les définitions qui suivent s'appliquent au présent article.
(b) any other multiple unit residential complex if it is described by paragraph (c) of the definition "residential complex" in subsection 123(1) and contains one or more residential units that are for supply as rooms in a hotel, motel, inn, boarding house, lodging house or similar premises and that would be excluded from being part of the residential complex if the complex were a residential complex not described by that paragraph.
b) tout autre immeuble d'habitation à logements multiples, s'il est visé à l'alinéa c) de la définition de « immeuble d'habitation » au paragraphe 123(1) et contient une ou plusieurs habitations qui sont destinées à être fournies comme chambres dans un hôtel, un motel, une auberge, une pension ou un gîte semblable et qui ne seraient pas considérées comme faisant partie de l'immeuble d'habitation si celui-ci n'était pas visé à cet alinéa.
« proche » L'ex-époux ou ancien conjoint de fait d'un particulier ou un autre particulier lié à ce particulier.
B is the total consideration.
254.1 (1) Les définitions qui suivent s'appliquent au présent article.
« bail de longue durée » Bail, licence ou accord semblable portant sur un fonds et prévoyant la possession continue du fonds pour une période d'au moins vingt ans ou une option d'achat du fonds.
B is the fair market value referred to in paragraph (c).
B la juste valeur marchande visée à l'alinéa c).
 In my analysis, there are obvious difficulties with the application of section 254 to this case as the NHRs belong to the purchasers and not to the builders. Section 234 of the Act directs that builders derive a deduction for NHRs only to the extent that those NHRs have been paid or credited to purchasers. Purchasers, not builders, are the "particular individuals" targeted to receive NHRs pursuant to section 254 of the Act. In this case, Polygon does not, in its own right, have an entitlement to the NHRs. In the documents signed on closing, the purchasers represented and warranted that they are entitled to a NHR in a specific amount as at the completion date and Polygon agreed to credit specific amounts to the purchasers.
 Even though Polygon did over-calculate the GST by under-calculating the rebate, the remedy is between the Minister and the purchasers. Allowing Polygon to claim a rebate for tax collected and remitted in error, where the tax is not refunded by Polygon to the purchasers, is not contemplated by Part IV of the Act. Registrants, such as Polygon, do not generally pay the tax or bear the burden, but merely function as tax collectors transferring revenues to the government (see Reference re: Quebec Sales Tax,  G.S.T.C. 44 (S.C.C.)). Accordingly, the Judge committed an error of law in concluding that Polygon could look to the Minister to obtain the extra rebate credits.
 I would allow this application for judicial review, in part, and set aside the judgment of the Tax Court of Canada dated February 4, 2002. I would remit the assessment back to the Judge for redetermination on the basis that the transactions constitute a single assignment of a leasehold interest to each of the purchasers, that Polygon is therefore not deemed to self-supply in accordance with the provisions of subparagraph 191(1)(b)(ii) of the Act, and that the NHRs are to be calculated in accordance with subsection 254(2). As the builder, Polygon is not in a position to claim any excess rebate that would result from the calculation under subsection 254(2). No costs were sought and none should be awarded.
STYLE OF CAUSE: The Queen v. Polygon Southampton Development Ltd.

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