GST
GST
&
&COMMODITY
HSTTimes
TAX
Today’s leading thinking on GST,
Customs, PST and related taxation issues
David M. Sherman, BA, LLB, LLM, www.davidsherman.ca
Editor: Barry Hull, Hull Tax Consulting Ltd. • email: [email protected]
OCTOBER 2014
Vol. XXVIII No. 8
NOTES FROM THE EDITOR
On October 10, 2014, the Department of Finance introduced a
Notice of Ways and Means Motion to amend the Excise Tax Act
(“ETA”) (among other legislation) to implement many of the
changes proposed with the February 11, 2014 federal budget.
Much of the changes deal with pooled registered pension
plans, adding these investment plans into the provisions of the
ETA that govern financial institutions, selected listed financial
institutions (SLFIs), financial services and rebates for tax
paid in relation to these various entities and their supplies. A
“pooled registered pension plan” will be defined as a financial
institution by the addition of subparagraph 149(5)(a)(i.1), as a
subset of “registered pension plans”. The definition of “excluded
activity” in section 172.1 (Pension Plans) will be amended to
include these plans. Definitions found in subsection 123(1) will
be changed to “pooled registered pension plan” (PRPP) and
“PRPP administrator”, as well as “registered pension plan”
and “participating employer” has been expanded to cover the
PRPPs. The calculation of the “pension rebate amount” found
in subsection 261.01(1) of the ETA has been replaced, so anyone
dealing with this type of rebate needs to review the adjustments
to ensure that their clients are aware of the changes. Definitions
in section 261.01 have been adjusted: “qualifying employer”,
qualifying pension entity”, employee PRPP contribution”, and
“employer contribution”. Formula in section 261.01 has been
changed as well, where necessary to include the new definitions.
The definition of “manager” found in the Selected Listed Financial
Institutions Attribution Method (GST/HST) Regulations has been
amended to include “registered” pension plans. These changes
are effective December 14, 2012 to match the announcement of
these changes.
IN THIS ISSUE
NOTES FROM THE EDITOR
The editor comments on the proposed changes to the
legislation announced with the Notice of Ways and Means
Motion released in October 2014, relating to the 2014
federal budget. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
WHEN GOODS ARE “WITHOUT SPECIFIC CHARGE” IN A
BUNDLE OF PRODUCTS AND SERVICES
Vern Vipul of KPMG Law LLP reviews The Princess
Margaret Hospital Foundation decision and comments on
the application of similar law found in the Manitoba RST
legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
WILL THE COURTS ACCEPT A RECISSION TO CHANGE THE
IMPACT OF GST/HST?
The editor looks at the recent BC Supreme Court decision
in the cases involving 0741508 BC Ltd., 0768723 BC
Ltd., Kelowna Mountain Development Services Ltd., and
Kelowna Mountain Limited Partnership where a sale to a
limited partnership generated unrecoverable tax. . . . . . . . . 58
NEW HOUSING REBATES: WHAT DOES IT TAKE TO PROVE
ELIGIBILITY?
The editor looks at two recent court decisions concerning
the purchase and resale of residential complexes and the
claim for a GST/HST New Housing Rebate. . . . . . . . . . . . . . . . 61
Publications Mail Agreement # 40065782
GST & COMMODITY TAX
Vol. XXVIII No. 8 — OCTOBER 2014
completion of the renovation or alteration, the building or part,
as the case may be, is or forms part of, a residential complex
[Underlined text indicates the changes made.]
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No one involved in this publication is attempting herein
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The definitions of “builder” and “substantial renovation” could
apply to sales on or before April 8, 2014 depending on the whether
the supply would have been taxable under the new definitions and
when and how the GST or HST was collected.
The calculation of the tax to be self assessed on subsidized or nonprofit housing, as set out in section 191.1, the formula is changed
with respect to the value for the purposes of subsections 191(1) to
(4). It applies to a supply of a residential complex, or an addition
to a residential complex, deemed by subsections 191(1) to (4) on
or after April 1, 2013 unless the construction or last substantial
renovation of the complex or addition began on or before April 8,
2014, in which case the self-assessment will be the lesser of the
amounts calculated using the old formula and the new formula.
Section 259 of the ETA has an addition, subsection (4.11) which
restricts rebate claims for charities that operate one or more
health care facilities on a not-for-profit basis and persons who are
designated to be municipalities only in relation to activities specified
in the designation, to tax paid in relation to the health care facility
operation or the designated municipal activity, as the case may be.
Either party must clearly remove from their rebate claim, tax paid in
respect of any other activity per the new provision.
Last and not least, Part V to Schedule VI of the zero rating provisions
has a new section, 6.3 that will allow zero rating for:
A supply made to a non-resident person that is not registered
under Subdivision d of Division V of Part IX of the Act of
(a) a service of refining a metal to produce a precious
metal; or
(b) an assaying, gem removal or similar service supplied
in conjunction with the service referred to in paragraph
(a).
With respect to residential complexes, the definition of “builder” in
subsection 123(1) of the ETA has been changed, effective for supplies
made after April 8, 2014, to remove the phrase: “in the case of a
residential condominium unit, the construction of the condominium
complex in which the unit is situated”. “Substantial renovation” in
subsection 123(1) has been changed to read:
This change will apply to any supply made after April 8, 2014 and to
any supply made on or before that day if the supplier did not, on or
before that day, charge or collect an amount as or on account of tax.
“substantial renovation” of a residential complex means
the renovation or alteration of the whole or that part of a
building, as described in whichever of the paragraphs (a) to
(e) of the definition of “residential complex” is applicable to
the residential complex, in which one or more residential units
are located to such an extent that all or substantially all of the
building or part, as the case may be, other than the foundation,
external walls, interior supporting walls, floors, roof, staircases
and, in the case of that part of a building described in
paragraph (b) of that definition, the common areas and other
appurtenances, that existed immediately before the renovation
or alteration was begun has been removed or replaced if, after
56
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GST & COMMODITY TAX
WHEN GOODS ARE “WITHOUT SPECIFIC
CHARGE” IN A BUNDLE OF PRODUCTS
AND SERVICES
Vol. XXVIII No. 8 — OCTOBER 2014
12. The following persons or classes of persons are exempt from
tax with respect to their consumption of prepared food products
where the prepared food products are provided by them to
others without specific charge:
Vern Vipul
KPMG Law LLP
[email protected]
1. Hospitals.
In Princess Margaret Hospital Foundation v. Ontario (Minister of
Revenue)1 decision, the Ontario Superior Court of Justice held that
prepared food products purchased by a charitable organization
qualified for exemption of Ontario provincial sales tax (“PST”).
Of primary focus was the statutory interpretation of the phrase
“without specific charge”, and whether the prepared food products
were considered sold without specific charge when provided
together with a bundle of other products and services for a single
price.
3. Penal or correctional institutions.
Facts
The Princess Margaret Hospital Foundation (the “Foundation”) was
a registered charity for income tax purposes and periodically held
events to raise funds for its charitable endeavours. The Foundation
would provide prepared food products to the attendees at some of
these events.
While the Foundation would charge a registration fee or require
that a ticket be purchased in order to attend some of these events,
a separate breakdown of the charge of the prepared food products
was not provided to the attendees. Rather, the attendees were
charged a single amount to attend the event which included all
aspects of the event, including the prepared food products. An
attendee would not be entitled to a discount or partial refund where
he or she chose to forgo the prepared food products.
The Foundation applied to the Ontario Minister of Revenue (the
“Minister”) for a refund of Ontario PST that it paid to its vendors
for the cost of the prepared food products at its events (pursuant
to section 12 of regulation 1012 of the Ontario Retail Sales Tax Act
(“RSTA”), as discussed below). The Minister allowed the refund with
respect to events where there was no charge to attendees. However,
the Minister denied the refund for events where the attendees paid
an amount to attend on the basis that the requirement in section
12 that the prepared food products be provided “without specific
charge” was not met.
The Foundation appealed the issue to the Ontario Superior Court
of Justice.
Legislation
Subsection 2(1) of the RSTA imposed an obligation for every
purchaser of tangible personal property to pay Ontario PST.
Section 12 provided an exemption for the consumption of prepared
food products in certain circumstances, as follows:
1
Princess Margaret Hospital Foundation v. Ontario (Minister of Revenue),
2014 CarswellOnt 10761, 2014 ONSC 4572 (Ont. S.C.J.).
2. Nursing homes and homes for the aged.
4. Religious, charitable or benevolent organizations.
5. Employers where the prepared food products are provided
to their employees in eating establishments operated by or
on behalf of the employer.
6. Schools and universities where the prepared food products
are provided to a student in an eating establishment
operated by or on behalf of the school or university.
[Emphasis added.]
Foundation’s Position
The Foundation took the position that, for the events in question,
the prepared food products were provided “without specific charge”
to the attendees and therefore met the requirements of section 12.
The Foundation’s view was that the term “without specific charge”
only disqualified circumstances where there was a separate charge
for the prepared food products themselves, and therefore the sale
of prepared food products together with a bundle of other products
and services for a single fee still qualified for the exemption.
Minister’s Position
The Minister took the position that the prepared food products were
not provided “without specific charge” on the basis that the overall
fee included a charge for the food, and therefore did not qualify for
exemption pursuant to section 12.
Court’s Decision
The Court noted that the issue was one of statutory interpretation,
and provided a summary of the relevant legislative analysis of the
RSTA. An example provided by the Court was where a hospital
provides a meal to a patient without specific charge and where
someone buys a meal from a cafeteria in the same hospital. The
purchase of the food by the hospital for providing to patients
without specific charge would qualify for exemption pursuant to
section 12, but the purchase of food by the hospital for sale in its
cafeteria would not qualify for exemption.
It was also noted that the RSTA did not require that the fee charged
for the event be itemized, and while the Income Tax Act did require
that the charitable receipt show the amount of the gift by the
taxpayer and this be separate from the “advantage” received by the
taxpayer, there was no income tax requirement to explicitly indicate
the amount of any prepared food product from other bundled
products and services.
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GST & COMMODITY TAX
Vol. XXVIII No. 8 — OCTOBER 2014
The Court applied principles of statutory interpretation to conclude
that “without specific charge” refers to prepared food products and
not an overall price and therefore there must be a specific charge for
the prepared food products. In the Court’s view, the language of the
legislation was precise and unambiguous. After reviewing dictionary
definitions of “specific,” the Court agreed that the term meant in this
context a definite or exact charge for the prepared food products
themselves. An interpretation in favour of the Minister would mean
that the term “specific” would be superfluous as section 12 would
then only need to use the words “without charge”.
However, the Court did not confirm whether the words “without
specific charge” meant that the charge not be shown on the
attendee’s ticket. The Court questioned whether an internal
breakdown available to the Foundation for the prepared food
products, and therefore capable of being shown on the ticket, would
satisfy whether there was a specific charge. The Court did not make
a determination on this basis as there was no evidence before it that
the Foundation had an internal breakdown.
The Minister also unsuccessfully argued that the other institutions
listed under section 12 (such as hospitals, nursing homes,
employers, schools and universities) normally provide meals at their
own locations without specific charge and usually on a continuous
basis, and this should influence the statutory interpretation of
section 12 with the result that a charitable event held by the
Foundation at a different location should be excluded. This was
rejected by the Court as, among other things, the exemption for
employers and schools and universities only applied in limited
circumstances (for example, only where the prepared food products
are provided in eating establishments operated by or on behalf of
the employer or school or university).
The Court ultimately concluded that the prepared food products
met the requirements of section 12 and therefore qualified for
exemption.
Commentary
It will be interesting to see whether The Princess Margaret Hospital
Foundation decision will have an impact for Manitoba RST, which
contains a similar exemption for prepared food and beverages
provided in certain circumstances “without charge” by a charitable
or non-profit organization, or elementary or secondary school.2 The
Manitoba exemption does not include the word “specifically” and
the requirement is that the food or beverages be provided “without
charge”. To the extent that the Manitoba courts interpret the
Manitoba provisions differently from the Ontario equivalent because
of the lack of the word “specifically”, a charitable organization may
not qualify for an exemption of Manitoba RST on its purchases of
food it provides at events for which it charges a single-entry fee.
It will also be interesting to see if the decision has any impact on
interpreting other indirect tax provisions where the application of
2 Subsection 3(28) of Manitoba’s The Retail Sales Tax Act. It is noted that
the sale of food is generally exempt for PST purposes in British Columbia
(pursuant to section 139 of British Columbia’s Provincial Sales Tax Act)
and Saskatchewan (pursuant to paragraph 8(1)(s) of Saskatchewan’s
The Provincial Sales Tax Act).
58
tax depends on whether the goods or services are provided “without
charge” or “without specific charge”.3
3 For example, section 3 of Schedule VII of the Excise Tax Act allows tourist
literature of governments to be imported free of GST/HST when the
literature is for public distribution “without charge”.
WILL THE COURTS ACCEPT A RECISSION
TO CHANGE THE IMPACT OF GST/HST?
Barry R Hull
Hull Tax Consulting Ltd.
[email protected]
This particular case1 brings to light the court’s position (at least the
BC Supreme Court, which we assume represents the position of all
courts until this decision is challenged) on undoing transactions
by parties where an unexpected application of the HST legislation
occurred as the result of poor planning or of simple ignorance.
In summary, two numbered companies (0741508 BC Ltd, and
0768723 BC Ltd.) formed a partnership (Kelowna Mountain Limited
Partnership) with a third party, Kelowna Mountain Development
Services Ltd. acting as the general partner. One individual, Mark
Consiglio, is the sole shareholder of the two numbered companies
and the general partner. Shares in the limited partnership were
offered to outside investors, who were limited partners. The intent
of the project was to have the limited partnership acquire the
properties owned by the two numbered companies and, through
the partnership, develop the land into recreational property that
would eventually engage in commercial activity. Envisioned were
a golf course, wine tasting facilities, a ski hill, suspension bridges,
meeting and banquets facilities, and other tourist attractions. At the
time of the court case, capital investment in the land had begun,
but the overall project has been restricted by the HST assessment.
The entire situation was brought about because of three factors:
firstly, to move ownership of the properties to the partnership,
a sale had to be made from the numbered companies to the
partnership; secondly, the partnership needed to get registered
for GST/HST, which it did not until the CRA audited the sale of the
land; and lastly, with the province of BC changing from HST to GST,
and the timing of the activities, there was a permanent loss of tax
to the partnership (and resultant gain to the federal and provincial
governments) of 7% of the purchase price of the properties.
There is no doubt that the project, if it is completed as planned, will
result in the making of taxable supplies and the federal government
will receive GST from the collection of the tax on consideration
payable for use of the facilities. The province of BC, on the other
hand, had everything been done correctly, would have received
no HST, but would have received PST on tangible property used
in construction of the various structures, among the various other
taxes the province collects.
1
Re 0741508 B.C. Ltd., 2014 CarswellBC 2830, 2014 BCSC 1791, [2014]
G.S.T.C. 124 (B.C. S.C.).
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GST & COMMODITY TAX
The parties involved, which included Mr. Consiglio, who had roughly
more than 30 years of experience in real estate development, and
his professional advisors, both accounting and legal, made the
assumption that HST was not a concern for the partnership. They
believed that when you bought real property for use in commercial
activity, nothing had to be done in respect of the tax. They are
not alone. In my years of dealing with the real estate industry,
accountants, and lawyers, even those who “specialize” in real
estate, the understanding of how GST/HST applies to the sale of
real property is sadly lacking.
The operation of paragraph 221(2)(b) of the Excise Tax Act (“ETA”),
in avoiding the purchaser of taxable real property having to pay
the GST or HST to the seller, is misconstrued to mean that no tax
is payable at all and the requirements for this provision to apply
is often overlooked or incorrectly applied. I have seen many cases
where the self-assessment of the tax and claiming of ITCs is never
done, preventing the CRA from becoming aware of the transaction,
and leading participants to believe that their intentions to enter
commercial activity will magically make the GST/HST go away.
Perhaps it is the difference between a “registrant” and being
“registered” that confuses some. I have seen many lawyers use the
first word when the second is required, as in paragraph 221(2)(b). A
“registrant” is defined as a person who is “registered” or is “required
to be registered” per the definition in subsection 123(1). For anyone
who has not registered voluntarily, the requirement to register is
dictated in section 240 of the ETA:
Every person who makes a taxable supply in Canada in the course
of a commercial activity engaged in by the person in Canada is
required to be registered for the purposes of this Part, except
where
(a) the person is a small supplier;
(b) the only commercial activity of the person is the making
of supplies of real property by way of sale otherwise
than in the course of a business; or
(c) the person is a non-resident person who does not carry
on business in Canada.
“Small supplier” is defined in subsection 148(1) and the partnership
may qualify, but even if it does not, registration is triggered by
making “a taxable supply in Canada in the course of a commercial
activity”. Unless the partnership made a taxable supply in the course
of its proposed activity, it would not be “required to be registered”
and therefore, was not a “registrant” unless it voluntarily registered.
Since it did not, it was not a “registrant”.
One wonders whether the CRA would back date the registration if
asked. Subsection 240(3) of the ETA states that an application for
registration may be made if the person is engaged in commercial
activity in Canada (among other possible conditions). Section 241 of
the ETA says:
The Minister may register any person that applies for registration
and, upon doing so, must assign a registration number to
Vol. XXVIII No. 8 — OCTOBER 2014
the person and notify the person in writing of the registration
number and the effective date of the registration.
The provision does not state any limitation on the effective date. The
Minister can back date the registration as far back as requested, if
the Minister so chooses. In fact, in situations where a small supplier
collects GST or HST on taxable supplies, the Minister will choose to
back date the registration to the day before (or the day of) the first
instance where tax was collected. However, the person would not
be a “registrant” if they were a small supplier and the tax would
technically have been collected in error. However, by back dating
the registration, the CRA creates the situation where the “small
supplier” now has to file returns prior to being a “registrant”,
complete with late filing penalties and late payment interest.
Obviously the Minister benefits from the earlier registration and
so has good reason to allow back dating. However, many requests
for back dating where a person was not a “registrant” and did not
collect GST or HST are simply attempts to qualify for ITCs for GST
and HST paid prior to getting registered. Where the ITCs might
be allowed under section 171 of the ETA or under a change of use
provision, there is no major benefit to back date a registration, but
for tax payable on period costs, like rent or consumables, where
there is no provision to recover the tax, the CRA has maintained a
staunch refusal to accommodate a person who wishes to register
and did not get around to it when they should.
Should the CRA allow a back dated registration before a
person makes a taxable supply?
One could argue that anyone commencing a project intended
to generate taxable supplies (i.e. in the course of “commercial
activity”), is required to register (at some point) and is therefore a
“registrant”. But the definition requires them to first make a taxable
supply in Canada. This principal was understood clearly in the early
days of GST, when lawyers would automatically register a new shelf
company for those times when a client requested a company that
was in existence at some point in the past. Due to the requirement
for a registered person to file GST/HST returns on a regular basis,
many lawyers no longer register the shelf company until it is sold
to a client and registration is requested in order to complete a
transaction (purchase of real property; purchase of a business under
section 167 of the ETA, as two examples).
However, the CRA has taken the consistent position that until you
actually make a taxable supply, or you actually collect tax on a taxable
supply they will not back date a registration more than 30 days.
This does create an unfair imbalance where a person begins its
commercial activity by acquiring taxable goods or services, such as
constructing a new plant or store. Section 171 of the ETA attempts to
correct that, with the notional ITCs allowed, but as we all know, you
have to be a “small supplier” immediately prior to registering to use
that provision. Perhaps a broad interpretation of “small supplier”
could include anyone who has not made a taxable supply (even
though having more than the threshold of taxable supplies through
associates), but where a person makes a single dollar of taxable
supplies while their associates exceed the limit of taxable supplies,
they are instantly not a “small supplier” and unless they can back
date the registration to a point in time before that happens, they
are not technically allowed the notional ITCs in section 171. If they
59
GST & COMMODITY TAX
Vol. XXVIII No. 8 — OCTOBER 2014
discover the requirement to register after the 30 days allowed to
back date their registration, unless they actually collected tax on a
supply, they lose their right to the notional ITCs. However, they may
be able to use the “change of use” rules to get ITCs.
This case though deals more importantly in the basis unfairness
of the change from 12% HST to 5% GST, where the legislation was
altered to change the calculation of “basic tax content” that is used
in section 171 and in the “change of use” provisions, by deeming that
the “basic tax content” with respect to real property in BC to be only
5% if the person is making the ITC claim after February 17, 2012.
So in the present case, with the partnership acquiring taxable real
property from the two numbered companies, with the partnership
not being “registered” and not having made a single taxable supply
and not having collected GST or HST on a taxable supply, the CRA
has determined that paragraph 221(2)(b) does not apply. The CRA
was not required under current policy to back date the registration
of the partnership and therefore the two numbered companies were
required to collect 12% HST on the consideration payable for the
purchase of the land. The CRA explained that the partnership could
claim ITCs to recover some of this tax, but due to the change in the
definition of “basic tax content” the recovery would only be 5% of
the purchase price and not the 12% being assessed.
Had the partnership been “registered” for GST/HST prior to the
purchase of the land from the numbered company, they would have
been allowed the application of paragraph 221(2)(b) and would
have been required to self-assessed the GST/HST on line 205 of
their relevant GST/HST return, but would also have been entitled
to claim an offsetting ITC for that tax. Their net position would have
been zero tax cost.
However, all parties to the project, despite years of experience,
failed to register the partnership, failed to indicate on the
Agreement for Purchase and Sale of the properties that HST
applied to the proceeds and the buyer would have to pay the tax to
the seller or produce a GST registration that was valid on the day
the sale closed; they failed to self-assess the HST on the sale (which
would have been required if none was paid to the seller due to the
purchaser being registered) and failed to claim the ITCs for the tax
payable to the CRA. These are all steps which are normally done in
the purchase and sale of taxable real property.
The CRA assessed the HST that was collectible by the numbered
companies, with gross negligence penalties and interest. I have
a real problem with the gross negligence penalty, since the
government was not “out of pocket” due to the failure to register
the partnership and the parties obviously did not act in a way that
avoided net tax, but rather in a manner that created a tax payable
where there should be none. The interest is a natural result of
payment of tax later than required.
The only reason the parties could see to make the transaction go
away was to apply to the courts for a rescission, a nullification of
the sale of the land to the partnership. This would ignore the
agreements signed by the parties, transform the development of
the land from expenditures by the partnership to expenditures
of the numbered company that owned the property and alter the
benefits accruing to investors in the partnership, who were lured to
the project by ownership of the land (and for some, perhaps partial
development of the land when they invested), and now they are
promised the partnership will acquire the land after the partnership
registered for GST/HST.
The law that was considered to achieve the rescission was first a
“common law mistake” that lead to unfair treatment. The second
solution was an “equitable rescission”. The court looked at Stone’s
Jewellery Ltd. v. Arora, 2009 CarswellAlta 1883, 2009 ABQB 656,
[2010] 2 C.T.C. 139, [2009] G.S.T.C. 168 (Alta. Q.B.) and the judge
in the case was prepared to rescind the transfer of land from a
corporation to individuals and then to a second corporation which
resulted in income tax applying to the gain in FMV of the land that
was not expected. The reasons for the rescission were as follows:
(i) the mistake in question constituted a mistake as to the legal
effect of the transaction, not merely the consequences,
(ii) there was not adequate legal remedy available,
(iii) the relief sought was limited, and
(iv) there was no evidence that any third parties who were not
involved in the original transaction would be prejudiced
The court looked at a number of cases where the court’s equitable
jurisdiction to grant an order for rescission was examined. In
quoting Fridman2 the court stated
Rescission is only possible where to grant such remedy would
not operate to the prejudice of a third and innocent party, who
was not implicated in the original contract and so ought not to
be affected adversely by the subsequent, later avoidance of that
transaction.
In dismissing the arguments of Justice and the CRA, and confirming
the request to rescind the original sale of the lands to the
partnership, the court stated in its conclusion:
As stated by Thompson J. in McMaster,3 if there has been an
honest, even though inadvertent mistake, equity will afford
relief in any case that the court considers that it would be
unfair, unjust or unconscionable not to correct it. If the order for
rescission is not made the CRA and through it, either Canada
and/or the Province, stand to gain over $6 million plus accruing
interest, solely because of the mistake. That in my view, would
not be fair or just.
The solutions to the CRA assessment are few: request a back date
of the GST registration for the partnership to the day before the
purchase of the property; or make the transaction disappear.
Whether they asked the CRA to backdate the registration or not, it
was not entertained by the CRA.
60
2 Page 762 of Gerald H. Fridman, The Law of Contract in Canada, 6th ed.
(Toronto: Carswell, 2011).
3 McMaster University v. Wilchar Construction Ltd., 1971 CarswellOnt 775,
22 D.L.R. (3d) 9 (Ont. H.C.).
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GST & COMMODITY TAX
The result of this decision is to nullify the sale of lands that are the
focus of the partnership, change all improvements of the lands from
the action of the partnership to that of the numbered companies,
and to override the clear intention of the legislators in drafting the
transition rules for the change from HST to GST in the Province
of BC. When the rule on calculating the “basic tax content” was
announced, it was clear to everyone (in the know) that this would
penalize anyone who had failed to recover 100% of the HST paid
on real property due to non-commercial use transforming to
commercial use. The change of use rules would only allow a 5/12s
recovery of HST paid (ignoring the effect of depreciation that is built
into the formula) and that was the stated intention of the law.
I am concerned that this case achieves two very negative results: the
first is eliminate a clear penalty provision of the ETA simply because
someone got hurt by it and the government(s) got an unfair windfall
and secondly, it disputes the rule of law that ignorantia juris non
excusat or in plain language, ignorance of the law excuses no one.
The court remarked at how simple it was to register for GST,
and yet rewards the parties who failed to follow such a simple
path. Three individuals with extreme experience concerning real
estate development did not know or even inquire as to the proper
application of the law. Even two years after the transactions that
were rescinded, they had not registered the partnership, had not
reported the HST payable on the land purchases, and of course had
not filed a single GST/HST return.
If we take the logic of the court to the extreme, then every person
who is caught by failing to comply with the ETA should be able
to re-write their agreements, invoices and all other documents to
correct negative tax effects that give a windfall to the government.
For example, if I miss claiming an ITC within the four-year statutory
limit, why not rescind the acquisition of the taxable goods or
services and acquire them within the limits. More in keeping with
this case, why not rescind all transactions that occur prior to my
GST registration, so that they can be redone after registration,
allowing full ITCs.
I understand that the disallowance of full ITCs for HST paid on
real property in BC is extremely prejudicial for anyone who suffers
as a result. This court decision seems to say that where the law is
unfair, there is a remedy available if we just wish away our actions
and make them new in such a manner that the tax does not apply.
In hindsight, the CRA could have avoided this result (assuming
they don’t get it reversed by way of appeal), simply by back dating
the GST registration, if not to the day of the land purchase, which
would eliminate any assessment, then to a time shortly thereafter,
which would allow assessing the numbered companies the HST on
the sales, but then allowing the partnership to claim ITCs at 12%.
If the CRA also had not assessed gross negligence penalties, the
numbered companies would have interest payable for the delay in
reporting (or perhaps the 4% wash interest), but no huge “unfair,
unjust” windfall for the government. The BC Supreme Court
may have felt the actions of the CRA were not so egregious and
dismissed the request to rescind the land sales. Is this a case where
greed has cost the CRA not only this particular windfall, but has
opened the door to many other requests for rescission by those who
didn’t know any better and didn’t bother to find out?
Vol. XXVIII No. 8 — OCTOBER 2014
NEW HOUSING REBATES: WHAT DOES
IT TAKE TO PROVE ELIGIBILITY?
Barry R Hull
Hull Tax Consulting Ltd.
[email protected]
The GST New Housing Rebate has been around since the
introduction of the tax in 1991 and it was matched with a similar
program in the Nova Scotia from the introduction of HST until July
2010, and with programs in BC and Ontario when they harmonized.
However, neither BC nor Ontario set a limit after which the rebate
would decrease to zero (as the GST Rebate does between $350,000
and $450,000). PEI, like New Brunswick and Newfoundland
previously, decided to have only a transitional new housing rebate
to try to remove the PST buried in the price of houses that had HST
charged on them, during the transition from the PST-era to the HST
one. There is and was no general rebate for the purchasers of new
housing in those three provinces. Quebec has new housing rebate,
at 50% of the QST payable to a maximum of $9,975, decreasing
gradually on houses costing more than $200,000 until the rebate
is zero at $300,000. [Where there is a new housing rebate, there
is a parallel program for New Residential Rental Property Rebates
for new landlords; however, these programs do not face the same
audit issues as the Hew Housing Rebates due to a different criteria
for qualifying.]
So there is a limit for the value of the residential complex for
GST and QST, but not for the provincial portion of the HST in BC
(while the tax was in place) and Ontario. With these New Housing
Rebates, to qualify for the payment, the person buying the complex
must acquire the property to use as their, or their relation’s, primary
place of residence. This is true whether the person constructs the
residential complex themselves (or has someone build it for them)
or they acquire it from a developer. In the latter case, the developer
can accept the signed New Housing Rebate form from the purchaser
and can grant an equal credit to the buyer, in return for claiming a
deduction from net tax of the developer’s GST/HST or QST return.
This question is on both GST 190 (rebate assigned to seller) and
GST 191 (self-built complex): “Did you purchase the house for use
as your, or your relation’s, primary place of residence” (Section B –
House Information). Both forms clearly state this requirement in the
description “Who can apply for this rebate?” at the end of the form.
There should be no doubt that a person buying a new residential
complex to flip it, or to rent it, does not qualify. (They may in the
latter case qualify for the ‘landlord’s rebate’ noted above, if they
rent it out on a long term basis and meet the other requirements.)
The wording in the legislation allows for situations where a person
may buy the complex to use as their or a relation’s primary place of
residence, and for some reason, they change their plans. Paragraph
254(2)(b) of the Excise Tax Act (“ETA”) states: “at the time the
particular individual (the buyer) becomes liable or assumes liability
under an agreement of purchase and sale of the complex or unit
entered into between the builder and the particular individual, the
particular individual is acquiring the complex or unit for use as the
primary place of residence of the particular individual or a relation
of the particular individual”. A “relation” is defined for the purpose
of this section to mean: “another individual who is related to the
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GST & COMMODITY TAX
Vol. XXVIII No. 8 — OCTOBER 2014
particular individual or who is a former spouse or common-law
partner of the particular individual”. “Related persons” are defined
for the purpose of the ETA in subsection 126(2) and that provision
refers us back to subsections 251(2) to (6) of the Income Tax Act.
So the rebates are allowed not only when you or a relation actually
move into the complex as a primary place of residence, but also
if you intended that to be the case. In either case, we have had
numerous attempts for people that have bought new housing for
the purpose of reselling, make a claim for the new housing rebates.
They not only reduce the actual GST/HST/QST that they are
required to pay the government, but they also then sell the complex
(usually at a substantial profit) without the purchaser paying any
tax. The government not only doesn’t get the full tax on the first
purchase, but it doesn’t get any tax on the “real” sale, at a markedup price.
In examining applications for these rebates, the CRA and
subsequently the courts, must decide if the particular individual or
a relation used the complex as a primary place of residence, or that
this was their intention and it was frustrated.
In the first instance, you would imagine that proving you moved into
a new house would be easy. You change your mailing address, the
address on your credit cards, on your driver’s license (as required by
law); you sell your old place, rent it out to tenants, or stop renting
it from a landlord; you have receipts to show that your furniture
was all moved to the new house; you enroll your children in a new
school; you have a new employer ( a major reason for buying a new
house); you change your spending habits to shop closer to the new
location; you change your bank branch; you join a new church or
social club; you change sports clubs to one closer to your “new”
home; and any other proof of a permanent change. A key factor will
be that you don’t sell the new house within a few months or weeks
of first moving in, without being able to show a very good reason
why, such as a new job opportunity, a loss of job, or you can’t afford
the new mortgage, or the illness or death of a relative that requires
you to be closer to family.
applicant did not move out of the old house, purchased multiple new
complexes for rent or sale, advertised the complex for sale within
a few weeks of taking possession and was employed in the real
estate industry. The fact that inadequate insurance was acquired
in the new place was just one more reason that the Honourable
Justice Lyons refused to accept the claim, but to a large extent,
the testimony of the applicant and her family members was not
credible. The judge does a thorough job of setting out many reasons
why the purchase of the new house did not meet the requirements.
In the Kandiah case,2 the Honourable Justice Miller outlines
adequately (for my sake at least), that the rebate claimant never
moved their furniture to the new house, made little effort in selling
the old house, did not change their address (supposedly the
daughter moved into the new house), and they listed the new house
for sale within weeks of taking possession. The applicant remained
in their old house, which of itself is not a fatal fact, but had acquired
another property for the daughter that had to be rented out due
to the cost (they could not afford to buy a place strictly for the
daughter to live in) and eventually bought a new property a few
years later and the whole family moved into that house. They did
claim the New Housing Rebate for that house as well, but with the
sale of their old house, they hopefully can show that they actually
used the last complex as their primary place of residence.
These cases are not unusual, but the court showed tremendous
patience in allowing the claimants to prove that they met the
requirements of the rebate, and in both cases, there were so many
reasons why they did not do what a person normally does when they
plan to move into a new home, they failed to meet the test.
I have seen cases where the person claiming the rebate does not
do many of the usual steps, especially changing addresses on their
legal documents or with the post office. You can hook up utilities at
the new place (electricity, water, cable) but a landlord will do the
same. In this age of cellphones, many people don’t have a landline,
but if you do have one at the old house and retain it, while not
setting one up at the new house, it does look suspicious.
Where the person does not actually move into the new complex,
but rather sells it shortly after taking possession without it being
occupied, to qualify for the rebate, they must be able to show
why they changed their intention to use it as a primary place of
residence. (See the notes above on selling a complex shortly after
moving in for reasons that might make sense.)
We have had two recent cases that demonstrate why the CRA
and the courts will deny the rebate. In the Berkovich decision,1 the
1
62
Berkovich v. R., 2014 CarswellNat 3426, 2014 TCC 268, [2014] G.S.T.C.
117 (T.C.C. [Informal Procedure]).
2 Kandiah v. R., 2014 TCC 276, 2014 CarswellNat 3567, [2014] G.S.T.C. 120
(T.C.C. [Informal Procedure]).
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