Date: 19990302
Docket: 98-1373-GST-I
BETWEEN:
A.M.E. AEROWORKS SERVICES LTD.,
Appellant
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for judgment
(Delivered orally from the bench at Edmonton, Alberta, on January 22, 1999)
McArthur, J.T.C.C.
[1]This appeal is from an assessment made under the Excise Tax Act (for goods and services tax) for the period November 1, 1994 to October 31, 1995. The issue is whether the Appellant was required to collect GST on rental payments received of $37,125.55 pursuant to a lease with Shell Canada when those lease payments were required to be paid and were paid directly to RoyNat in accordance with an assignment of rents and leases. The parties agreed to the relevant facts and presented argument only. The agreed statement of facts (Exhibit A-1) is as follows:
1. The Appellant A.M.E. Aeroworks Services Ltd. (“AME”) was engaged in commercial activity and supplied property and services taxable at 7% during the relevant period between August 1, 1992 and October 31, 1995;
2. AME has been registered for the purposes of the Act since January 1, 1991 under registration number 100184704RT;
3. By lease agreement dated August 18, 1989, AME leased from the City of Edmonton for a term of 35 years the land referred to as Area 21 and located at the Edmonton Municipal Airport;
4. AME constructed a General Aviation Terminal at Area 21 (which terminal building and the Area 21 land are referred to collectively as the “Premises”), for which RoyNat Inc. (“RoyNat”) provided financing in the sum of $3,730,000.00.
5. As security for the financing, AME gave RoyNat a debenture dated March 20, 1990 over all of its property, and granted RoyNat a mortgage on AME’s leasehold interest of the Premises;
6. By lease agreement dated April 1, 1990 (the “Lease”) AME leased the Premises to Shell Canada Products Limited (“Shell”) for a term of 15 years;
7. By sub-lease agreement dated April 1, 1990 Shell subleased the Premises to Skyharbour Aviation Ltd.;
8. Skyharbour Aviation Ltd. is a corporation associated with AME;
9. By agreement dated May 8, 1990, AME gave RoyNat an assignment of rents and leases (the “Assignment”) of the Premises as additional security for the financing;
10. By caveat dated January 28, 1991, RoyNat registered the Assignment in the North Alberta Land Registration District;
11. By supplementary debenture dated February 25, 1992, RoyNat advanced an additional $400,000.00 to AME, and RoyNat took as additional security from AME an second assignment of rents and leases for the Premises dated February 25, 1992;
12. In September 1994, AME defaulted on its loan payments to RoyNat.
13. By letter dated September 15, 1994, RoyNat delivered a copy of the Assignment to Shell, thereby rendering the Assignment operative and absolute;
14. At all material times, and pursuant to the terms of the Assignment, RoyNat and AME agreed that AME would be liable to Shell for the obligations, liabilities and covenants contained in the Lease;
15. Amounts collected by RoyNat from Shell pursuant to the Assignment were applied by RoyNat to reduce AME’s liability under the loan from RoyNat;
16. Shell did not pay GST for the period of November 1, 1994 to October 31, 1995;
17. Neither RoyNat nor AME collected or remitted GST in the amount of $36,125.55 for the period of November 1, 1994 to October 31, 1995, as set out below:
Period EndingGST Unreported
January 31, 1995 $9,629.62
April 30, 1995 $9,527.63
July 31, 1995 $9,308.46
October 31, 1995 $8,659.84
18. By Notice of Assessment number 00000000117, dated July 11, 1997, for the period August 1, 1992 to October 31, 1995, the Minister of National Revenue (the “Minister”) assessed AME net tax in the amount of $86,083.19, interest in the amount of $3,389.86 and penalty in the amount of $3,439.84. As part of the assessment, the Minister assessed AME for GST related to premises leased to Shell Canada Products Limited in the sum of $37,125.55 for the period November 1, 1994 to October 31, 1995.
19. AME objected to Notice of Assessment number 00000000117 by Notice of Objection, dated September 30, 1997.
20. The Minister confirmed the assessment by Notice of Decision 115480014 dated April. 15, 1998.
21. By Notice of Appeal filed May 22, 1998, AME appealed the Notice of Decision number 115480014 dated April 15, 1998.
[2]The position of the Appellant as contained in its Notice of Appeal is:
[The Appellant] was not responsible for collecting and remitting GST for lease payments for the period in question because the lease had been absolutely assigned to A.M.E.’s mortgage lender RoyNat for that period; or alternatively, that RoyNat was deemed to have seized, repossessed the property pursuant to section 183 of the Excise Tax Act and therefore RoyNat was responsible for collecting the GST.
The position of the Respondent is:
... since the Appellant owned the premises at all material times, and that the assignment acted solely to intercept rent or lease payments payable to the Appellant, it is therefore submitted that the Appellant was the supplier of the premises to Shell Canada, and pursuant to subsections 165(1) and 221(1) of the Act the Appellant was required to collect, report and remit GST on said supply.
The question, therefore, is who had the responsibility for collecting and remitting the GST.
Analysis
[4] In consideration for RoyNat advancing $3,730,000 to the Appellant, the Appellant entered into an assignment of rents and leases dated May 8, 1990, wherein it as assignor, assigned all its right, title and interest in a lease with Shell Canada including the rents payable under that lease. In consideration for the additional sum of $400,000, by agreement dated January 29, 1992, the Appellant agreed to grant RoyNat an extension of its leasehold interest. By letter dated September 15, 1994 (Exhibit A-1, Tab J), the solicitors for RoyNat advised Shell Canada that:
... Pursuant to the terms of the assignment the interest of A.M.E. Aeroworks Services Ltd., as lessor in the Head Lease, has now been assigned to RoyNat Inc., and we therefore require that all payments presently due and all future payments due pursuant to the Head Lease be made directly to our client at the following address: ...
I agree with the Appellant’s submission that RoyNat stepped into its shoes vis-à-vis the Appellant and its lease with Shell Canada. At the very least, after September 15, 1994, RoyNat was the person making the supply and therefore, the supplier.
[5]Subsection 165(1) of the Excise Tax Act states:
... every recipient of a taxable supply made in Canada shall pay to Her Majesty in right of Canada a tax ...
In this case, Shell was the recipient. Subsection 136(1) provides that a supply by way of a lease of the right to use real property is deemed to be a supply of real property. The Appellant was making the taxable supply, being the lease of real property, to Shell Canada. After the exercise of its rights under the assignment agreement, RoyNat became the supplier within the meaning of section 123 of the Act and supply includes a lease within the definition contained in that section. Taxable supply is defined as the supply in the course of commercial activity and, therefore, the supply was a taxable supply.
[6]Subsection 221(1) states that every person making a taxable supply is responsible for collecting and remitting GST. As stated, in exercising its rights under the assignment of lease, RoyNat became the person making the supply of a lease of property to Shell Canada. RoyNat became responsible for collecting and remitting GST. Surely it is common sense to conclude that RoyNat, who took over the benefits of the lease from the Appellant by collecting the rents, also took over the responsibility to collect and remit GST. To decide otherwise would impose an unrealistic burden on the Appellant that borders on the absurd.
[7]Counsel for the Respondent submitted further that in the assignment from the Appellant to RoyNat, some rights, interests and liabilities remained with the Appellant. Again, I agree with the Appellant’s position that no rights or interests remained with the Appellant, although it has further liabilities to RoyNat. It is clear RoyNat took the greatest and most complete rights the Appellant had in its lease with Shell. RoyNat exercised those rights and so advised Shell Canada. RoyNat is now the lessor and supplier and collected the rents. Shell Canada, as a recipient of a taxable supply, is required to pay a tax pursuant to subsection 165(1).
[8] I do not accept the Respondent’s argument that paragraph 7 of the assignment of lease limits the assignment. The entire lease was assigned to RoyNat absolutely. Paragraph 7 leaves a responsibility or obligation on the Appellant. To enforce obligations under the lease, Shell would look to RoyNat and RoyNat may have a claim over against the Appellant. Paragraph 7 does not limit the absolute assignment.
[9]Pursuant to the September 15, 1994 notice, Shell was advised by RoyNat that RoyNat was in fact the lessor. RoyNat’s intention was clear. Surely it cannot have it both ways. The assignment was of the entire lease and not simply the rentals. While it is not necessary to consider the Appellant’s alternate position, I am satisfied that RoyNat was deemed, pursuant to subsections 183(9) and (10), to be making a taxable supply and had an obligation under subsection 221(1) to collect GST from Shell Canada.
[10]Applying subsection 183(10) to the present facts, I find that in order to satisfy a debt owing by the Appellant, the creditor, RoyNat, exercised a right under a debt security to cause the supply of property. The debt security means a right to be paid money. Counsel for the Respondent submitted that the definition of debt security in section 123 does not include a lease. I find that the assignment from the Appellant to Roynat was an assignment of a right to be paid money and is a debt security.
[11]The appeal is allowed and since this dispute is for more than $7,000.00, no costs are awarded.
Signed at Ottawa, Canada, this 2nd day of March, 1999.
"C.H. McArthur"
J.T.C.C.