Tax Court of Canada Judgments

Date: 19980820

Docket: 96-859-GST-G

BETWEEN:

HIDDEN VALLEY GOLF RESORT ASSOCIATION,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

MARGESON, J.T.C.C.

[1] By reassessment, notice of which is dated December 18, 1995, the Minister of National Revenue (the “Minister”) assessed the Appellant in the amount of $61,369.58 for Goods and Services Tax (“GST”), pursuant to section 296 of the Excise Tax Act (“ETA”), on amounts charged to the members of the Appellant (“members”), on the basis that these were amounts owing on taxable supplies of goods and services provided to the members under subsection 165(1) of the Act. The Minister further imposed penalties and interest, pursuant to section 280(1) of the Act, on net GST assessed against the Appellant. Upon subsequent application under section 280(1.1) of the Act, the Minister cancelled the penalties and interest in the amount of $7,552.12 on February 22, 1996, leaving in issue in this appeal, the tax assessed against the Appellant.

[2] Before the commencement of the trial, the Appellant indicated that he was withdrawing his alternative submissions, as contained in paragraphs 4, 5 and 6 of the Notice of Appeal.

[3] At the conclusion of the trial, counsel for the Respondent withdrew the allegations contained in paragraph 9(j) of the Amended Reply to the Notice of Appeal. This presumption was that the Appellant did not supply land to cottage owners under lease, license, or similar arrangements, but rather, simply operated the resort during the relevant period.

[4] Before the trial commenced, the parties filed an Agreed Statement of Facts, as set out below, thus eliminating the necessity of calling viva voce evidence.

AGREED STATEMENT OF FACTS

INTRODUCTION

The parties admit the following facts, provided that such admissions are made for the purpose of this Appeal only and are not to be used against either party, on any other occasion, by any person. The parties shall be free to produce further evidence in this appeal provided that it does not conflict with the facts agreed to herein.

1. In 1974 the Siksika Indian Band (the “Band”) surrendered a portion of the Siksika Indian reservation (the “Resort Lands”) to Her Majesty the Queen in Right of Canada (the “Resort Lands Landlord”). By lease signed November 6, 1975, (the “Resort Lands Head Lease” - Exhibit “1”) the Resort Lands Landlord leased the Resort Lands to Siksika Vacation Resort Company Ltd. (“SVRC”). The term of the Resort Lands Head Lease expires December 31, 2013.

2. SVRC subdivided a portion of the Resort Lands into approximately 340 lots (the “Lots”). Each of the Lots was of a size that was reasonably necessary for the use and enjoyment of the Lot as a place of residence for individuals.

3. SVRC serviced the Lots for the purpose of the usage of the Lots for the construction and occupation of residential cottages and further constructed a nine-hole golf course, golf course clubhouse, artificial lake, tennis courts and other summer vacation Resort Amenities on the Resort Lands (the “Resort Amenities”).

4. By sublease agreements (the “Sublease Agreements”), a representative sample of which is Exhibit “2”, SVRC subleased, for a term ending October 31, 2013, approximately 300 of the Lots as bare land to individuals (the “Cottage Owners”) who constructed cottages on such Lots at their own expense. The parties agree that the rights and obligations between SVRC (its successors and assigns, including the Appellant) and the Cottage Owners are governed by the Sublease Agreements, as amended by a Sublease Amending Agreement (Exhibit “6”).

5. In accordance with the terms of the Sublease Agreement, each of the Cottage Owners prepaid SVRC the aggregate of the rental amount referred to in paragraph 3.1(a) of the Sublease Agreement for the entire period from the commencement of the lease up to and including October 31, 2013.

6. From approximately 1977 to 1991, SVRC maintained the Resort Amenities and made the Resort Amenities available to the Cottage Owners pursuant to the Sublease Agreement.

7. On or before April 1 of each year, each of the Cottage Owners paid SVRC a maintenance fee (the “Maintenance Fee”) as stipulated in paragraph 3.l(b) of the Sublease Agreement pursuant to a “Notice of Maintenance Fee Payable” as set out in Schedule B to the Sublease Agreement.

8. Pursuant to Schedule B of the Sublease Agreement, the Maintenance Fee notice was required to separate the aggregate charge into the following categories:

a) Golf course operation and maintenance;

b) Water irrigation and lake supply operation and maintenance;

c) Other Resort facilities and maintenance;

d) Security;

e) Administrative;

f) Additional facilities and maintenance; and

g) Operating contingency.

9. SVRC maintained and operated the Resort Amenities until March 31, 1991. By Master Purchase and Sale Agreement dated January 1, 1991 (the “Master Purchase and Sale Agreement” - Exhibit “3”), SVRC sold certain interests to the Appellant effective April 1, 1991. The Master Purchase and Sale Agreement includes the Master Purchase and Sale Agreement, the Resort Management Agreement (Exhibit ”4”), the General Security Agreement (Exhibit “7”), the Sublease Amending Agreement (Exhibit “6”) and the Escrow Agreement (Exhibit “5”). The parties agree that the provisions of these agreements reflect the rights and obligations among the parties to these agreements.

10. As part of the Master Purchase and Sale Agreement, among other things:

a) the Appellant obtained SVRC's beneficial interest in the Resort Lands Head Lease and SVRC’s interest in the Sublease Agreements;

b) the Appellant obtained the right to maintain and operate the Resort Amenities;

c) the Appellant agreed to pay SVRC an annual indexed rights payment of $150,000 (the “$150,000 Rights Payment”); and

d) certain terms of the Sublease Agreements were amended by the Sublease Amending Agreement.

11. During the Assessment Period the Appellant made the Resort Amenities available to the Cottage Owners and the Cottage Owners paid Maintenance Fees in accordance with the terms and conditions of the Sublease Agreements.

12. During the assessment period, in accordance with both the Sublease Agreement, as amended by the Sublease Amending Agreement, as well as the Resort Management Agreement, the Appellant invoiced the Maintenance Fees to the Cottage Owners early in each calendar year, based on its budget for the coming fiscal year ending the following October 31. The total anticipated expenditure were divided by the number of Cottage Owners to determine the amount payable by each Cottage Owner on account of the Maintenance Fees.

13. For the 1991 year, the Cottage Owners were each invoiced $2,800 under the Sublease Agreement on account of Maintenance Fees (including $600 on account of a special assessment used to pay the first $150,000 Rights Payment).

14. For the 1991 year, the $2,800 Maintenance Fee was calculated on the basis of the estimated income and expenses of the Appellant set out in the 1991 Resort Budget (letter from Treasurer of the Appellant dated January 18, 1991 and attached Resort Budget (the “1991 Resort Budget”) (Exhibit “8”).

15. For the 1991 year, each Cottage Owner was presented with an invoice for the 1991 Maintenance Fees (Exhibit “9”) in accordance with paragraph 3.1(b) of the Sublease Agreement, as amended.

16. For the 1992 year, each Cottage Owner was presented with an invoice for the 1992 Maintenance Fees in the amount of $2,350 (Exhibit “11”) in accordance with paragraph 3.1(b) of the Sublease Agreement, as amended. The 1992 Maintenance Fee was calculated on the basis of the estimated income and expenses of the Appellant set out in a 1992 Resort Budget which was largely consistent with the 1991 Resort Budget.

17. The Maintenance Fees were paid by the Cottage Owners pursuant to the Sublease Agreement, as amended. The Appellant used the Maintenance Fees, in part, to maintain the Resort Amenities. These items may be further described as follows:

Golf Course Operations and Maintenance

a) The Appellant operated and maintained a nine-hole golf course and clubhouse on the Resort Lands. Cottage Owners and their families had priority of use of the golf course and paid no green fees for the use of the golf course (Sublease Agreements, articles 6.1(d) and 9.3(a)).

b) The itemized expenses for the “golf course” set out in the 1991 Resort Budget (Exhibit “8”) identify in more detail the expenses incurred by the Appellant in connection with these activities.

Water Irrigation and Lake Supply Operation and Maintenance

c) The Appellant maintained a water supply system for the purposes of maintaining an artificial lake and water supply to the cottages and the golf course.

d) The itemized expenses for “Water and Irrigation” set out in the 1991 Resort Budget (Exhibit “8”) identify in more detail the expenses incurred by the Appellant in connection with these activities.

Other Resort Facilities Operation and Maintenance

e) The Appellant maintained and operated various recreational, food and beverage services in conjunction with the golf course, the clubhouse, the artificial lake, the tennis courts and the other recreational facilities and programs it operated.

f) The itemized expenses for “Facilities Operation and Maintenance” set out in the 1991 Resort Budget identify in more detail the expenses incurred by the Appellant in connection with these activities.

Security

g) The Appellant was responsible for security, and in that regard it maintained a staffed gate at the main entrance to the Resort Lands and year-round patrolling.

h) The itemized expenses for “Security” set out in the 1991 Resort Budget identify in more detail the expenses incurred by the Appellant in connection with these activities.

18. The Appellant employed a full-time general manager who was responsible to oversee the operation and maintenance of the Resort Amenities, to provide liaison with the board of directors and executive of the Appellant and to deal with the needs of the Cottage Owners.

19. The itemized expenses for “Management and Administration” set out in the 1991 Resort Budget identify in more detail the expenses incurred by the Appellant in connection with its administrative functions.

20. Generally, pursuant to the Sublease Agreement, payment of the Maintenance Fees under the Sublease Agreement allowed the Cottage Owners and their families unlimited use of all recreational activities (golf, swimming, tennis) maintained and operated by the Appellant.

21. Persons who were not Cottage Owners or members of their families, including members of the public, were allowed to play golf, dine at the club house and enjoy the other recreational facilities operated by the Appellant for a taxable fee during the Assessment Period.

22. The Appellant charged and remitted GST on revenues generated from the lounge, restaurant, and green fees charged to the general public.

23. A Cottage Owner who failed to pay the Maintenance Fee as stipulated in the paragraph 3.1(b) of the Sublease Agreement was subject to the remedies provided to the Appellant pursuant to the Sublease Agreement.

24. In 1997, the Appellant obtained an Order in The Court of Queen’s Bench of Alberta against Pierre Gaudefroy (Exhibit “11”) by reason of Pierre Gaudefroy having failed to pay the Maintenance Fee under the Sublease Agreement between the Appellant and Pierre Gaudefroy. The Appellant then entered into an Assignment and Novation Agreement between itself, Allan G. Gawley and Siksika Vacation Resort Company Ltd. (Exhibit “12”).

25. The Appellant is a non-profit organization incorporated under the Societies Act (Alberta), originally under the name “Siksika Cottage Owners Association”.

26. The Appellant was registered for GST purposes at all material times. Its GST registration number is 129204269.

27. In its GST return for the period ending June 30, 1991, the Appellant did not report or remit GST of $54,002.45 (7/107 x $825,466) relating to the aggregate Maintenance Fees it charged to 294 Cottage Owners pursuant to the Sublease Agreement. In its GST return for the period ending June 30, 1992, the Appellant did not report or remit GST of $45,352.80 (7/107 x $693,250) relating to aggregate Maintenance Fees it charged to 295 Cottage Owners pursuant to the Sublease Agreement.

28. By Notice of Assessment lOCT9300390 (the “Assessment”), dated March 31, 1993, for the period April 1, 1991 to September 30, 1992 (the “Assessment Period”), the Minister of National Revenue (the “Minister”) assessed the Appellant in the amount of $74,818.14 on account of the GST referred to in paragraph 26 (less certain amounts for input tax credits) and in the amounts of $8,996.18 and $7,582.78 on account of interest and penalties respectively (the “Assessment”).

29. By Notice of Objection dated April 7, 1993 (the “Notice of Objection”) the Appellant objected to the Assessment.

30. On August 25, 1995, the Minister granted the Appellant a designated municipal status under section 259 of the Excise Tax Act (the “Act”), effective April 1, 1991, for the purposes of the Appellant's operation of a water distribution system that it operates and for the provision of unbottled water, pursuant to sections 22 and 23 of Part VI of Schedule V to Part IX of the Act (abbreviated format used here: V, 1, 22 and 23).

31. By Notice of Decision and Notice of Reassessment ALB7651 (the “Reassessment” - Exhibit “A” to this Statement of Agreed Facts), dated December 18, 1995, the Minister partly allowed the Notice of Objection by reducing the Assessment to reflect the designation set out in paragraph 5 in connection with the Appellant’s supplies of sewerage and water to the Cottage Owners and to reflect the related municipal rebate. A further reduction was made to reflect a supply made by the Appellant to an aboriginal.

32. The Minister considered the Appellant’s application under section 281.1 of the Act for cancellation of penalty and interest relating to the Reassessment and the Minister exercised the Minister’s discretion and cancelled penalties in the amount of $7,552.12 on February 22, 1996.

33. This action is an appeal by the Appellant, in accordance with section 306 of the Act, to have the Reassessment vacated and have a reassessment made on the basis that the aggregate Maintenance Fees paid by the Cottage Owners to the Appellant during the Assessment Period were for the supply of land and therefore were an exempt supply in accordance with V, 1, 7 of the Act.

ISSUE

34. The parties agree that the sole issue is whether the Maintenance Fees were paid by each of the Cottage Owners as consideration for a taxable supply or as consideration for an exempt supply in accordance with Schedule V, Part I, section 7 of the Act.

DATED at the City of Calgary, in the Province of Alberta, this 26 day of May, 1998.

FELESKY FLYNN

Solicitors for the Appellant

Per:___________________

H.George McKenzie,

Counsel for the Appellant

DATED at the City of Edmonton, in the Province of Alberta, this 26 day of May, 1998.

George Thomson

Deputy Attorney General of Canada

Solicitor for the Respondent

Per:____________________

J.E. (Ted) Fulcher

Counsel for the Respondent

Revenue Canada Goods And Services Tax

Revenu Canada Taxe sur les Produits et Services

Notice of Reassessment

Avis de nouvelle cotisation

Notice Number - Numéro d'avis ALB 7651

Date 95/12/18

GST Account # - Numéro de compte TPS 129204269

Hidden Valley Golf Resort Association

Box 9

Cluny, Alberta

TOJ OSO

Period Reassessed:

Période visée par la nouvelle cotisation: 91/04/01 To 92/09/30

Net Tax - Taxe nette $61,369.58 DR	Instalments - Acomptes provisionels	Rebates - Rembousements $520.75 CR	Payment/Set-Off - Paiement/Compensation
Net Interest - Intérêt net $8,963.30 DR	Penalties - Pénalités $7,552.12 DR	Refund Amount - Remboursements	Amount Owing - Montant dû $95,505.45

THIS NOTICE OF REASSESSMENT REFERS TO THE NOTICE OF DECISION ATTACHED.	CET AVIS DE NOUVELLE COTISATION SE RÉFÈRE À L'AVIS DE DÉCISION Cl-JOINT.
INTEREST AND PENALTY ARE CALCULATED UP TO: 93/03/31	DES INTÉRÊTS ET DES PÉNALITÉS SONT CALCULÉS EN DATE DU: 93/03/31

INFORMATION	RENSEIGNEMENTS
If you wish to review any aspect of this reassessment please contact your local Tax Services Office.	Si vous désirez obtenir des précisions au sujet d'un aspect quelconque de la nouvelle cotisation, veuillez vous adresser au bureau de district local des services de taxe.
The Minister after reconsidering an assessment may, in respect of any matter, reassess a person for any tax, net tax, rebate, penalty, interest or other sum payable by that person under the Act.	Le ministre peut, après avoir examiné à nouveau une cotisation, établir une nouvelle cotisation pour déterminer la taxe, la taxe nette, le remboursernent, la pénalité, l'intérêt ou autre somme payable par une personne en vertu de la loi.
APPEALS	APPELS
Section 306 of the Excise Tax Act provides that you may appeal the assessment to the Tax Court of Canada within ninety (90) days from the day this Notice is sent to you.	L'article 306 de la Loi sur la taxe d'accise stipule que vous pouvez interjeter appel de la cotisation à la Cour canadienne de l'impôt dans les quatre-vingt dix (90) jours suivant le jour où le présent avis vous a été envoyé.
INTEREST AND PENALTY	INTÉRÊT ET PÉNALITÉ
Interest and penalty, will continue to accrue, at the rates prescribed by law, on debit balances owing. A statement indicating your current account balance will follow this Notice.	Des intérêts et des pénalités continueront de courir, aux taux réglementaires, pour les soldes impayés. Un état indiquant la balance de votre compte suivra le présent avis.

DEPUTY MINISTER NATIONAL REVENUE - SOUS MINISTRE DU REVENU NATIONAL

Summary of Changes

Sommaire des Changements

Hidden Valley Golf Resort Association

Objection Number- Numéro d'opposition: ALB 7651

GST Account Number - Numéro de compte TPS: 129204269

Period -Période: 91/04/01 To 92/09/30				Per Appeals/Selon les appels
	Reported Amount Montant Reporté A	Adjustment Ajustement B	Assessed Cotisation C = (A+B)	Adjustment Ajustement D	Reassessed Nouvelle cotisation E= (A+D)
Net tax - Taxe nette	($18,141.20)	$74,818.14	$56,676.94	$79,510.78	$61,369.58
Rebates - Remboursements	$0.00	$0.00	$0.00	($520.75)	($520.75)
Net Interest to: - Intérêt net au : 93/03/31		$8,996.18		$8,963.30
Penalties to: - Pénalités au : 93/03/31		$7,582.78		$7,552.12
Refund Amount or Amount Owing - Remboursement ou Montant dû		$91,397.10		$95,505.45

NOTE:

The “Refund Amount or Amount Owing” does not take into account any payments/set-offs that may have been made with respect to this reassessment.

Le “Remboursement ou Montant dû” ne prend pas en considération tous les paiements/compensations qui ont pu être effectués à l'égard de cette nouvelle cotisation.

DEPUTY MINISTER NATIONAL REVENUE - SOUS-MINISTRE DU REVENU NATIONAL

[5] The parties also agreed to the admission of a common booklet of exhibits, which was marked as Exhibit A-1. There was no limitation placed upon the admission of these documents and the documents speak for themselves.

Argument on behalf of the Appellant

[6] In argument, counsel for the Appellant took the position that the real issue was whether or not the maintenance fees paid by cottage owners pursuant to the Sublease Agreement was consideration for the supply of land to an owner of a residential unit affixed to the land for purposes of his use and enjoyment as a place of residence for individuals. Was the consideration paid for an exempt supply, pursuant to section 7 of Part I of Schedule V? If it were, GST would not be chargeable on the maintenance fees.

[7] The Appellant in the case at bar, stands in the position of the Siksika Vacation Resort Company Ltd. (“SVRC”) by virtue of the Sublease Agreement between this company and the Appellant. This formed the legal relationship that gave rise to the supply. The legal relationship between the Appellant and the tenants was that of landlord and tenant for a residential lot. The tenants paid the consideration as rent.

[8] He referred to what he considered to be the important documents, as set out in Exhibit A-1, Tabs 1 to 6, but more particularly the documents contained at Tabs 3, 4 and 6, being the Master Purchase and Sale Agreement between SVRC and Hidden Valley Golf Resort Association; the Agreement between SVRC and Hidden Valley Golf Resort Association, dated the first day of April 1991; the Escrow Agreement and the Sublease Amending Agreement, dated the first day of January, 1991.

[9] During the period in issue, the cottage owners paid the maintenance fee to the Appellant, who did not collect GST on the maintenance fee. The Respondent assessed the Appellant for GST on the full amount of the maintenance fee.

[10] Counsel argued that there was no GST payable on the maintenance fee because it was an amount paid for an exempt supply, as defined in subsection 123(1) included in Schedule V.

[11] Part I of Schedule V describes “exempt supply” as real property. Section 7 at the relevant time, read in part:

7. A supply

(a) of land (other than a site in a residential trailer park) by way of lease, licence or similar arrangement for a period of at least one month, made to

(i) the owner ... of a residential unit that is or is to be affixed to the land for the purpose of its use and enjoyment as a place of residence for individuals, ---

...

but not including any land on which the residential unit, mobile home, vehicle or trailer is to be affixed or situated, or any land contiguous to it, that is not reasonably necessary for the use and enjoyment of the unit, home, vehicle or trailer as a place of residence for individuals.

[12] Counsel argued that the first important question is: What was the maintenance fee paid for? In this regard, the Sublease Agreement, as amended, clearly stipulates, that the Appellant (as successor of SVRC) “does hereby demise and sublease to the tenant -- the lot, subject to the conditions, restrictions and covenants herein set forth and contained”.

[13] Further, pursuant to the Master Purchase and Sale Agreement and the schedules attached thereto, the Appellant stands in the place and stead of SVRC “in all matters except for those bearing legal title”, and the Appellant acquired all of the beneficial interest of SVRC in the subleases. Consequently, all consideration paid by the cottage owners was rent for this supply of land (i.e. “the lot”).

[14] The Sublease Agreement makes it clear that the cottage owners, as consideration for the lot, must pay rent. That rent is the aggregate of four amounts: annual (pre-paid) rent, the maintenance fee, additional facility assessment and “additional” rent. Notwithstanding the separate components, the aggregate amount is rent.

[15] In support of this argument, counsel referred to the cases of Re: Stanley Mills Co. Limited, [1924] 3 D.L.R. 40, Ontario Supreme Court (at pages 42-43) and Felton v. The Queen, 89 DTC 223 (T.C.C.) at page 235. It was his position that a tenant may agree under a lease to pay certain amounts, for improvements, to the landlord for the tenant’s share of the landlord’s expenses, as payment for the use of the demise property, such that the aggregate of amounts paid on the lease constitute rent for the demised property.

[16] According to counsel, the payment of the maintenance fee, a component part of the rent calculated on the Sublease Agreement as amended, was payment “for use of the demise property” (i.e. the lot). It is clear that the Appellant can remove the cottage owner from the lot for failure to pay the maintenance fee component of the rent. In fact, the Appellant has exercised its right as a landlord in this respect by removing cottage owners and re-subletting the lot in the past, as can be seen from the exhibits filed in this case.

[17] It was counsel’s contention that the Minister’s assessment ignores the contract giving rise to the supply and the consideration for the same as can be seen by the remaining presumptions set out in paragraphs 9(b) and (k) of the Amended Reply to the Notice of Appeal.

[18] Counsel made the point that Article 6.1(e) of the sublease makes it clear that the common facilities are those of the landlord. Therefore, there was no lease of anything to the tenants, except the lot. Further, by Article 9.3, the landlord agrees to maintain certain services to the tenants, as set out therein.

[19] In accordance with Article 10.1, no tenant was entitled to sublet any part of the sublease, but had to sublease the whole interest. Consequently, the tenant could not sublet the use of the golf course, while keeping the cottage to the tenant.

[20] The only supply contracted for between the Appellant and the cottage owner was the lot, that is a “supply” pursuant to the Sublease Agreement, as amended. There was no contract for the supply of anything but the lot. While the Appellant makes certain recreational amenities available to cottage owners, it is not contractually required to do so and the failure to do so is not an event of default under the sublease and carries no penalty.

[21] The cottage owner must pay all items described as rent in Article 3.1 of the Sublease Agreement in order to maintain the right to occupy the lot, irrespective of whether the amount reimburses, in whole or in part, the cost of the Appellant. There is no legal or contractual basis on which to base an argument that the Appellant does not supply land, or that the maintenance fees were consideration for the supply of something other than land.

[22] By admitting as a fact that the Sublease Agreement, as amended, governs the rights and obligations between the Appellant and the cottage owners, the Respondent has acknowledged that the payment of the maintenance fee is made in order to maintain the sublease agreement and the use of the lot in good standing.

[23] Counsel referred to the significance of Articles 2.02 and 20.5 of the Master Purchase and Sale Agreement. With respect to Article 2.05, this was significant because the Appellant stands as the landlord in substitution for SVRC as the bare trustee of the land and as registered owner (see also the Agreement in Exhibit A-Tab 4). This was amended by the Sublease Amending Agreement but not in any material way with the exception of the addition of the annual shared costs. Counsel took the position that the Respondent argued alternatively that there was a taxable supply of recreational land assessable to tax separate from the supply of the lot. Once again, he argued, there was no contractual basis for this assertion. This supply and the payment of consideration for the same was not provided for in the Sublease Agreement. The Sublease Agreement only provided for the payment of rent for the lot.

[24] Even if the Appellant could be regarded as supplying real property in addition to the supply of the lots and each supply should be regarded as a separate supply, the consideration paid by the cottage owners pursuant to the Sublease Agreement as amended was rent for the use of the lot. The failure to pay the rent would result in eviction from the lot. Therefore, no consideration was separately payable for any separate “supply” of resort facilities.

[25] There was only one contract, the Sublease Agreement and only one supply, the lot. The supply provided by the Appellant was provided pursuant to a single contract for a single consideration. The consideration under the sublease which, in part, reimburses the Appellant the costs of maintaining the recreational amenities and other costs is not optional but is mandatory for each cottage owner regardless of the actual use made of the recreational amenities. Consideration was paid as part of the rental for the sublease of the lot.

[26] The position taken by the Appellant relating to a single supply is consistent with the Minister’s published policy. See GST/HST Memoranda Series 19.2.2 Residential Real Property - Rentals.

[27] It was Counsel's contention that the Minister has assessed the Appellant based on a fundamental misunderstanding of the legal relationship between the Appellant and the cottage owners. The Minister assumed that the fees charged by the Appellant to the cottage owners were for and in respect of the use of recreational activities and services provided by the Appellant. This was a fundamental error. All amounts paid by the cottage owners under the Sublease Agreement as amended were paid as rent as defined in Article 3.1 thereof. That is, the cottage owners paid consideration for use of the demise of the property (the lot). Any other supplies or services, if any, were incidental. In accordance with the Minister’s own published policy, all of the consideration paid by the cottage owners was in respect of a single supply which is an exempt supply.

[28] Counsel was also of the opinion that the Respondent seemed to be focused on how the landlord spent the money, how the costs were calculated and not what the money was paid for.

[29] He compared the provision of the additional services by the landlord in the case at bar to any rental situation where a landlord supplies swimming pools, tennis courts or other services and it is all inclusive in the amount of rent paid. It does not matter how the landlord determined the amount of the rent. All that is paid by the tenant is rent including the maintenance fee. At the end of the day, it is rent charged for the lot.

[30] He argued that there was no basis for the alternative argument of the Respondent set out in paragraph 14 of the Amended Reply. No facts were adduced to support the alternative argument. There was no supply of land apart from the lot under the sublease agreement.

[31] If there was a separate supply of land there was no consideration paid for anything except the residential lot. The Sublease Agreement did not provide for consideration for anything except payment for the lot. Here counsel for the Appellant referred to the case Re: Stanley Mills Co. Ltd. [1924] 3 D.L.R. 40 (Ontario Supreme Court), at pages 42-43 and Felton v. M.N.R., 89 DTC 233, (TCC ) at page 235.

[32] Counsel took the position that where the landlord adds into the amount of rent payable, the cost of providing a laundry room or laundry facilities in an apartment building, where there is no discretion on behalf of the tenants as to whether or not it should be paid for, and where the tenant must pay the amount of the rent whether he uses the facilities or not, then the payment is still a payment for rent and not a payment for the use of the facilities. What the landlord requires is the payment of the rent.

[33] The appeal should be allowed and the Minister’s assessment quashed.

Argument of the Respondent

[34] Counsel for the Respondent argued that section 165(1) of the Act was the appropriate section. One must “go behind the scene” to determine what supply it was that gave rise to the consideration that was paid to the Appellant in this case, he argued.

[35] His position was that what was supplied in the present case was a taxable supply. The Appellant was carrying on a commercial activity. The Appellant and his predecessor were carrying on a business, that business was instituted for the purpose of deriving a benefit from exploiting the land.

[36] The question to be asked is what was the commercial activity that produced the obligation to the tenant to pay the Appellant a consideration? It does not matter what the name of the entity was nor what rights were created by the agreement between the parties. The question is always what was the commercial activity that was created? “The terms of the agreement between the parties cannot be used to hold the Minister hostage.”

[37] It is necessary to go behind the scene and look at the commercial reality of the transaction between the parties. What was the commercial activity and what was it to which the tax should be applied? In the case at bar, land is being treated as a special form of real property. In so far as the alleged exempting section of the Act is concerned it seeks to exempt that which is necessary for the use of the residence and that is all.

[38] Insofar as the policy statement of Revenue Canada is concerned counsel argued that this does not make law. If the facts relied upon in the policy statement do not fit perfectly within the law the policy statement is to be disregarded.

[39] In the agreement between the parties, clauses 3.1(a)(b)(c) all refer to a rent. However, 3.1(b) talks about a maintenance fee and not rent and the next paragraph talks in terms of maintenance and services. The schedule for costs that was introduced into evidence as part of the exhibit package does not refer to the commercial activity of supplying land. It sets out a schedule for the calculation of the maintenance fee. The obligation that was incurred by the Appellant as landlord was not to continue the resort but if there was no resort that was continued there would be no bill for the maintenance fee. Therefore it is not the supply of land on which the consideration is given but the supply of services.

[40] He submitted that the Appellant’s argument was based upon a consideration of section 6.1(e) of the Agreement. This section provided that the landlord was not bound to continue providing the services but this section must be read in conjunction with section 9.3. This section gives clear evidence of the activity which would attract the tax in this case.

[41] The Court should consider the services that were provided to the tenant: the use of a golf course, the cost of the maintenance and operation, purchase of chemicals and other materials which were necessary to run the golf course, such as supply of water and irrigation. Part of the fee was for the maintenance of the other facilities in the resort. Part of the maintenance fee also covered security and administration. This is evidence of the basis for the maintenance fee. The maintenance fee was for the supply of services and not for the supply of land. The tenant had to pay the maintenance fee for the use of the services.

[42] It is not significant that non-payment of the rent entitled the Appellant to cancel the lease of the land once it is determined what the nature of the commercial activity was that was going on. Tab 12 does not add anything to the Appellant’s argument. This deals with the landlord and tenant relationship, not with the nature of the commercial activity that was going on in this case.

[43] Reference was made to Tab 8 of the Agreed Book of Documents which was a budget for 1991. This related to the provision of the extra services not to the supply of land. The question is not whether it was rent but, what was the commercial activity that obligated the payment of the consideration? It is obvious that this was paid not for the supply of land but for the supply of services. Therefore, section 7 Part I of Schedule V does not apply to exempt the services in question from GST. We are dealing with a taxable supply and not a supply of land. The tax was properly levied under the appropriate section and the Minister was correct in doing so.

[44] Counsel referred to a number of cases in support of his contention that in interpreting the agreement in the present case one must look at substance rather than form, he referred to Entre Computer Centers Inc. v. R. [1997] 1 C.T.C. 2291 at page 2304:

... The question always is what is the real character of the payment, not what the parties call it

Secondly, a transaction which, in its true construction, is of a kind that would escape income tax, it is not taxable on the ground that the same result could be brought about by a transaction in another form which would attract tax.

[45] Counsel also referred to Tab B of the Book of Authorities, at page 1072 in the case of Parkland Crane Service Ltd. v. The Queen, 2 GTC 1067:

By way of overview, every transaction is subject to the GST unless somehow exempt. Subsection 165(1) requires everyone who receives a "taxable supply" to pay the GST.

[46] Counsel also referred to section 7 Part I of Schedule V but argued that the Court need not consider this section, but if it does, this section does not apply because in the case at bar we are dealing with the provision of services of the resort and not land. This section does not contemplate what has happened here under the scheme of the Excise Tax Act and the G.S.T. provisions. A supply is taxable unless it is specifically exempt. Sections 13.1, 13.2, 13.3 and 13.4 contain specific exemptions. It is not possible for one to contract out of a taxable supply by calling it rent.

[47] Counsel agreed that assumption j) in the Amended Reply to Notice of Appeal is not being relied upon. He submitted that he was entitled to rely upon the alternative argument because the evidence agreed to by the parties brought this argument into question, because paragraph 3.1(b) of the agreement does not deal with land but with maintenance fees. In light of J.A. Pollock v. Canada, [1994] 2 C.T.C. 385, the Respondent assumes the burden on that because it was not pleaded. The facts as proven support this argument.

Rebuttal

[48] In rebuttal counsel for the Appellant said that the Respondent was relying upon paragraphs 13 and 14 of the Reply to argue that the land referred to in Schedule V, Part I, Section 7 of the Act was dealing with raw land supplied to the cottage owners. There is not a great deal of authority on this issue. But what was paid in 1991 and 1992 has everything to do with the issue at bar. The payment was for the use of the land whereas the other services provided were extras offered as an inducement to the tenancy. One cannot be a person under section 9.3 of the agreement unless one is a tenant. There is no provision for specifically exempting what was supplied here because they were not separate supplies and they were provided by the landlord as part of the rent.

[49] In 1991 and 1992 what the cottage owners were paying for was the right to use the lot as a cottage, it was their place of residence. The tenant was required to pay all amounts under paragraphs 3.1(a), (b), (c) or (d). Therefore, the maintenance fee has to be considered to be an exempt supply.

Analysis

[50] The Court will at first make some general findings with respect to the GST provisions of the ETA.

[51] Under subsection 165(1) of the Act, every transaction is subject to the GST, unless somehow exempt. Every recipient of a taxable supply made in Canada is required to pay GST. A "taxable supply" is defined in section 123, as, "a supply that is made in the course of a commercial activity", but does not include an exempt supply.

[52] A "commercial activity" is also defined in section 123 and it includes virtually every type of activity, whether or not the activities are engaged in with an expectation of profit. (See Parkland Crane Service Ltd. v. The Queen, supra). Further, the term "supply" is defined in section 123 as including "the provision of property or a service in any manner, including sale, transfer, barter, exchange, licence, rental, lease, gift or disposition.

[53] The Court is satisfied that if the transaction in question attracts the GST under these provisions, then one cannot contract out of the attraction of the tax on the transaction, immaterial of the nature of the contract or agreement that is entered into, and immaterial of what provisions are contained in the agreement.

[54] The question is always asked as to what is the true nature or real character of the payment. It matters not what the parties call it, be it rent or some other term. (See Entre Computers Centers Inc. v. The Queen, supra).

[55] The true characterization of the payment in question is not necessarily determined by the manner in which it is paid, the period of time over which it is paid, the method of its calculation or whether it is paid in advance, periodically or in a lump sum. However, all of these factors may have some bearing in assisting the Court in determining the true nature of the payment, although none of them is necessarily conclusive.

[56] The Court will deal now with the specifics of the case at bar.

[57] There can be no doubt in this case that the Appellant was involved in a commercial activity under section 123. There can be no doubt that what the Minister sought to tax in the case at bar was a taxable supply, whether it was a service, as contended by counsel for the Respondent, or whether it was land as contended by counsel for the Appellant. Consequently, Ab Initio, "that which was sought to be taxed was taxable unless it is specifically exempted by some other provisions of the Act".

[58] In the case at bar, if that which the Minister sought to tax, was a service, then it is taxable and the argument of counsel for the Respondent that the Court need not even consider the provisions of section 7, Part I, Schedule V of the Act would be well taken.

[59] On the other hand, if the Court accepts the argument of counsel for the Appellant, that that which the Minister sought to tax was not a payment for a service (maintenance fee) then the Court must proceed further and consider whether or not it is exempted under the specific provisions of section 7, Part I, Schedule V, as contended by counsel for the Appellant.

[60] On the basis of the evidence, there can be no doubt that the Appellant did supply land in accordance with the Master Agreement and the sublease agreements. The land (the cottage lots) was used for the construction and occupation of residential cottages and the Minister did not seek to tax the amount which the Minister concluded to be related to the use of the lots, and only sought to tax the "maintenance fees" which were paid by each of the cottage owners during the years in question.

[61] These fees were clearly based upon a formula determined by the Appellant and calculated on the basis of the estimated income and expenses of the Appellant as can be seen in the resort budget. The documents placed into evidence by consent clearly show how the maintenance fee was determined in the years in question and the calculation clearly took into account the costs of the golf course operation, maintenance, such things as water and irrigation, other resort facilities and security. Further, in accordance with paragraph 3.1(b) of the Sublease Agreement, as amended, the amounts so invoiced to the residents were referred to as "maintenance fees" and not as "rent". Further, they were set off from paragraph 3.1(a) of the Sublease Agreement, as amended, which was prepaid rent, not calculated in accordance with the same formula.

[62] Counsel for the Appellant was convinced that it was the nature of the legal relationship between the Appellant and the cottage owners which dictated the proper characterization of the amounts in issue. He believed that the Minister had misunderstood the legal relationship between the Appellant and the cottage owners. However, as the Court has already indicated, it is not the nature of the relationship between the Appellant and the cottage owners that dictates what the true characterization of the payment is, even though the nature of the relationship may be of assistance in arriving at the proper characterization of the payment.

[63] The Court is satisfied that the argument of counsel for Respondent that "the terms of the agreement between the parties cannot be used to hold the Minister hostage" is a valid argument.

[64] In essence, what the Court must do in a case of this nature is to determine the commercial activity between the parties that gave rise to the payment. Counsel for the Respondent made the argument that the commercial activity involved here was not a supply of land and although clause 3.1(a) refers to "rent", paragraph 3.1(b) talks about a maintenance fee and the following paragraph refers to maintenance and services. Further, the Schedule for costs that was introduced into evidence as part of the exhibit package does not refer to the commercial activity of supplying land. It merely sets out a schedule for the calculation of the maintenance fee. Although this is not necessarily conclusive of the matter in issue, it is certainly significant when looked at in light of the provisions of paragraph 3.1(b).

[65] The Court agrees with the submission of counsel for the Respondent that this is clear evidence that the maintenance fee was for the supply of services and not for the supply of land.

[66] The Court agrees that the right of the Appellant to cancel the lease of the land for the non-payment of the maintenance fee as well as for the non-payment of rent is not determinative of anything and it is merely one clause in the agreement. It must be considered by the Court in trying to properly characterize the payment. Various clauses which deal with the landlord and tenant relationship are not that significant in determining the true nature of the payment in question.

[67] The Court is not satisfied that the Appellant can take any consolation in the argument that the other services provided for the cottage owners, including the use of the golf course and the other facilities were merely extras offered as an inducement to the tenancy. If the payment was for the provision of a service, then it matters not that landlord considers them to be extras included in the rent. There was no real evidence to suggest that this was so in any event.

[68] The Court does not accept the argument of counsel for the Appellant that there was no need to specifically exempt what was supplied here, because they were not separate supplies and they were provided by the landlord as part of the rent. Neither the landlord nor the tenant can make by agreement that which is taxable, non-taxable, either referring to it as rent or by intending to include it in the amount of rent paid for the use of the land.

[69] The Court is satisfied that a reasonable interpretation of all the evidence in this case, including the Sublease agreement as amended, leads it to conclude that the “maintenance fee” which is in issue here was a taxable supply and was not a payment for the supply of land, as contended by the Appellant.

[70] However, the Court will consider the provisions of section 7 of Part I of Schedule V to determine whether or not the maintenance fee was an "exempt supply" under that provision.

[71] The Court has already found that the maintenance fee was not rental paid for the supply of land but was a separate fee paid for the use of other facilities provided by the landlord. However, in the event that the maintenance fee was a payment for a supply of land, in accordance with the exempting provision of the Act, the Court is satisfied that that provision does not apply to exempt the payment in issue here because that provision does not apply to "any land on which the residential unit, mobile home, vehicle or trailer is to be affixed or situated, or any land contiguous to it, that is not reasonably necessary for the use and enjoyment of the residential unit, mobile home, vehicle or trailer as a place of residence for individuals".

[72] It is clear from all of the evidence that the only portion of the land which could reasonably qualify under this exemption provision is the land upon which the cottage unit is affixed or situated or any land contiguous to it that was reasonably necessary for the use and enjoyment of the unit, home, vehicle or trailer as a place of residence for individuals. It is difficult for the Court to conclude that the golf course and the other facilities supplied by the landlord could be considered to be reasonably necessary for the use and enjoyment of the land upon which the cottage was situated.

[73] The Court is satisfied that the legislators never intended that the item supplied here could be supplied to a tenant without tax because of the nature of the leasing agreement, whereas any other person making use of the same facilities would have to pay taxes on the items and indeed, any other competing business would be required to charge tax to all persons making use of the same services.

[74] In the event that the Legislature intended to exempt the item in question here from attracting taxation, it would have specifically included the supply as an "exempt supply" as it has done for other items, including specific services supplied to tenants by their landlords.

[75] The appeal is dismissed and the Minister's assessment is confirmed, with costs to the Respondent, to be taxed or agreed upon.

Signed at Ottawa, Canada, this 20th day of August 1998.

"T.E. Margeson"

J.T.C.C.