Tax Court of Canada Judgments

Date: 19980107

Docket: 97-1132-GST-I

BETWEEN:

LOEWEN, MATTHEW & ESTHER & FOSTER, MARLENE,

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

J.T.C.C.

[1] The Minister of National Revenue assessed the Appellants $8,839 in Goods & Services Tax (GST) and $7,575 in interest and penalty for which the Appellants deny liability.

[2] The Appellants, Matthew & Esther Loewen were married in 1990, Matthew was then 21 years old and recently graduated from University. The Appellant, Marlene Foster, is the wife of a home builder Sherman Foster. The following facts are taken primarily from the Reply to the Notice of Appeal and are not in dispute:

The Minister of National Revenue assessed the Appellant in the amount of $... (consisting of $11,500 Goods and Services Tax on a taxable supply of real property, and a credit of $1,357.47 Input Tax Credits relating to construction expenses) $3,940.83 interest, and $3,635.37 penalty, in respect of GST for the period from January 1, 1991, to March 31, 1991.

[3] The Appellants, through Matthew Loewen, stated that:

During 1990, Mr. Matthew Loewen constructed his personal residence at 5960-186th Street, Surrey, B.C. He received financing and other assistance from the Fosters in order to complete his home. The Fosters sought security for their financing by putting their name on the title of the lot in question. Mr. Loewen moved into his personal residence during January 1991. [...] The home was the personal residence of Mr. Loewen. There has been no GST claimed in construction of Mr. Loewen’s personal residence. All of the Appellants deny Revenue Canada’s allegation that they were in a business partnership. This was the only time the Fosters and Loewens have had any business dealing together.

[4] The facts can be briefly summarised as follows. In 1990, Matthew Loewen worked in his father’s kitchen manufacturing and installation business. He knew Mr. & Mrs. Foster through his father’s business. They agreed to assist him in the construction of a home to be used as Matthew & Esther’s primary place of residence. The Fosters being in the building business were to receive a builder’s fee. Matthew advanced $10,000 in cash received from his parents. Mrs. Foster advanced $25,000 approximately towards the building expenses and the balance of the money requirement came from a construction mortgage in the principal amount of $123,677 with interest at the rate of 13.5% with monthly payments of penalty and interest of $1,408.

[5] Within two weeks of commencement of construction, the house was listed for sale. All relevant documentation was in the three Appellants’ names. At some point, the Appellant, Matthew Loewen, changed his mind about making the house his permanent home because: a) he realised he was, to use his expression, “in over his head” and b) he and his wife wished to live closer to the Abbotsford United Church community in which they had taken an active interest.

[6] The Appellant, Matthew Loewen, moved into the house before final completion in February and March 1991.

[7] The house was sold by Contract of Purchase and Sale entered into on February 25, 1991. The transaction was completed on April 1, 1991.

[8] The principal issue in the matter before me is whether a taxable supply was made with respect to the residence in question.

[9] The Minister’s position is that the three Appellants together constituted a partnership. The partnership, as builder of the residence, is liable to remit the GST owing from the taxable self-supply resulting from Matthew Loewen’s occupancy of the residence prior to its sale in February 1991. Alternatively, the Minister submits that the partnership is liable for the GST owing from the taxable supply resulting from the sale of the residence to a third party, by contract dated February 25, 1991.

[10] The Appellants deny that they were in partnership and that a self-supply occurred.

[11] The determination of whether a partnership existed between the Appellants is a function of the law of partnership in the province of British Columbia, the province in which the transactions in question occurred. In Dale et. al. v. The Queen, 97 DTC 5252 at 5255 (F.C.A.), Robertson, J.A. (Décary, J.A. concurring) observed:

In determining whether a legal transaction will be recognized for tax purposes one must turn to the law as found in the jurisdiction in which the transaction is consummated. Often that determination will be made without the aid of guiding precedents which are on point and, hence, the effectiveness of a transaction may depend solely on the proper application of general common law and equitable principles. In some instances it will be necessary for the Tax Court to interpret the statutory law of a province.

[12] Sections 2 and 4 of the Partnership Act of British Columbia provide:[1]

2. Partnership is the relation which subsists between persons carrying on business in common with a view of profit.[[2]]

4. In determining whether a partnership does or does not exist, regard must be had to the following rules:

(a) joint tenancy, tenancy in common, joint property, common property or part ownership does not of itself create a partnership as to any property that is so held or owned, whether the tenants or owners do or do not share any profits made by the use of the property;

(b) the sharing of gross returns does not of itself create a partnership, whether the persons sharing the returns have or have not a joint or common right or interest in property from which or from the use of which the returns are derived;

(c) the receipt by a person of a share of the profits of a business is proof in the absence of evidence to the contrary that he or she is a partner in the business, but the receipt of a share, or of a payment contingent on or varying with the profits of a business, does not of itself make him or her a partner in the business, and in particular [...]

[13] All three Appellants were co-owners of the property.[3] All three Appellants were also mortgagors of the property, with Marlene Foster’s husband as guarantor. The Appellants were not unsophisticated parties unfamiliar with the construction industry: Matthew Loewen worked in his father’s kitchen manufacturing business and the Fosters were in the home building business. Soon after construction began the property was put up for sale.

[14] Following the completion of the sale of the property to a third party in the Spring of 1991, the Appellants’ solicitors wrote the following letter to the Appellants:

BRAWN & RANDALL

Barristers and Solicitors

April 3, 1991

Mr. and Mrs. Loewen and

Ms. Foster,

Surrey, B.C.

Dear Mr. & Mrs. Loewen and Ms. Foster;

RE: 5960 - 186A Street, Surrey

Sale to BOYNTON

We are pleased to advise that we have now received the proceeds of your sale of the above noted property, and we accordingly enclose:

1. Copy of our letter paying out your Mortgage to Surrey Credit Union;

2. Our receipted account for services rendered;

3. Our trust account cheque in the amount of $51,948.88, being the balance of the sale proceeds due to you.

Yours truly,

BRAWN & RANDALL

A copy of the trust account cheque referred to in the letter was not submitted as evidence, but the letter is clearly addressed to all three Appellants and the reference in the letter to the “sale proceeds due to you” can only be construed as a reference to all three Appellants. It may be inferred from the contents of the letter that the Appellants shared in the profits resulting from the construction and sale of the residential property.

[15] I am of the opinion that an operating motivation in the acquisition of the property was to profit from the sale of the property.[4] This intention may have been secondary but that it was present may, in my opinion, be correctly inferred. Accordingly, I believe that the Appellants were engaged in an adventure in the nature of trade. In the absence of evidence to the contrary, I am satisfied that the appellants carried on business[5] with a view to share in the profits and that, accordingly, a partnership existed between the three Appellants.

[16] Section 221 and subsection 228(2) of Part IX of the Excise Tax Act (the “Act”),[6] charge certain persons with the responsibility of collecting and remitting GST:

221.(1) Every person who makes a taxable supply shall, as agent of Her Majesty in right of Canada, collect the tax under Division II payable by the recipient in respect of the supply.

228. [...]

(2) Where the net tax for a reporting period of a person is a positive amount, the person shall remit that amount to the Receiver General on or before the day on or before which the return for that period is required to be filed.

[17] Subsection 123(1) defines “person” to include a partnership:

“person” means an individual, a partnership, a corporation, the estate of a deceased individual, a trust, or a body that is a society, union, club, association, commission or other organization of any kind;

[18] Accordingly, the Appellants’ partnership was liable to collect GST on any taxable supply made by it and to remit the net amount of tax, if any, owing.

[19] Subsection 123(1) of the Act defines the term “supply”. “Supply” means, subject to sections 133 and 134 of the Act, the provision of property or a service in any manner, including sale, transfer, barter, exchange, licence, rental, lease, gift or disposition. Section 133 of the Act modifies the definition of supply by deeming as a supply the entering into of an agreement to supply any property or service:

133. For the purposes of this Part, where an agreement is entered into to provide property or a service,

(a) the entering into of the agreement shall be deemed to be a supply of the property or service made at the time the agreement is entered into; and

(b) the provision, if any, of property or a service under the agreement shall be deemed to be part of the supply referred to in paragraph (a) and not a separate supply.

In the present matter, the property in question was sold by the partnership by means of an agreement in writing, i.e. Contract of Purchase and Sale, entered into on February 25, 1991. Pursuant to section 133, then, this transaction is deemed to be a supply of the property as of February 25, 1991.

[20] For the purposes of the period in question, “taxable supply” is defined in subsection 123(1) of the Act to mean “a supply that is made in the course of a commercial activity, but does not include an exempt supply;”.[7] As the supply was made in the course of a commercial activity as defined in subsection 123(1) of the Act, whether the supply of the property by the partnership is a taxable supply depends upon whether the supply is an exempt supply.

[21] Exempt supplies are defined in subsection 123(1) as those supplies included in Schedule V of the Act. Part I of Schedule V concerns supplies of real property. The provisions distinguish between supplies made by builders and persons who are not builders. In the present matter, given the partners’ interests in the property and their subsequent arrangements for the construction of the residence, the partnership clearly falls within the meaning of builder as defined in subsection 123(1) of the Act:

“builder” of a residential complex or of an addition to a multiple unit residential complex means a person who

(a) at a time when the person has an interest in the real property on which the complex is situated, carries on or engages another person to carry on for the person [...]

(iii) in any other case, the construction or substantial renovation of the complex, [...]

but does not include

(f) an individual described in paragraph (a), (b) or (d) who

(i) carries on the construction or substantial renovation,

(ii) engages another person to carry on the construction or substantial renovation for the individual, or

(iii) acquires the complex or interest in it,

otherwise than in the course of a business or an adventure or concern in the nature of trade, [...]

The exemption from “builder” status for individuals, found in paragraph 123(1)(f), does not apply to the partnership because an “individual” is defined in subsection 123(1) as a natural person, which the partnership is not.

[22] As to the provisions in Part I of Schedule V, it is clear that, as the partnership is a builder and not an individual, the supply by the partnership does not qualify as an exempt supply. Accordingly, the supply of the residential property by the partnership was a taxable supply as defined by the Act.

[23] With regard to the penalties and interest levied on the Appellants, there is no evidence before me as to whether any due diligence was exercised on the part of the Appellants and I am therefore unable to grant relief in this regard.

[24] The appeal is dismissed.

Signed at Ottawa, Canada, this 7th day of January 1998.

" C.H. McArthur "

J.T.C.C.

---