Date: 20010427
Docket: 2000-2606-GST-I
BETWEEN:
SEABROOK INVESTMENTS LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Beaubier, J.T.C.C.
[1] This appeal of a Goods and Services Tax (“GST”) assessment was heard pursuant to the Informal Procedure at Victoria, British Columbia on April 4, 2001. The Appellant called William Peereboom, a Registered Building Designer, and Robert Seabrook, the owner of the Appellant, to testify. The Respondent called Glen Foster, its auditor on the file, Ray Thomassen, a City of Victoria Building Inspector, and John Bowers, the appeals officer on the file, to testify.
[2] Paragraphs 7 to 18 of the Reply to the Notice of Appeal set out the matters in issue before the Court. They read:
By Notice of Assessment numbered 11CU0102137 dated August 12, 1999, the Minister of National Revenue (the “Minister”) assessed the Appellant’s reporting periods from January 1, 1996 to January 31, 1999, to include an under-reported net tax in the amount of $94,762.01, plus the corresponding interest and penalty in the amount of $9,9981.50 [sic] and $13,698.11, respectively.
The Appellant filed a Notice of Objection on September 20, 1999.
By Notice of Reassessment numbered 116 687 484 dated May 11, 2000, the Minister reassessed the Appellant to reduce the amount of interest and penalty to $5,047.76 and $8,011.45, respectively.
In so reassessing the Appellant, the Minister relied on the following assumptions of fact:
the facts stated and admitted above;
the Appellant was incorporated pursuant to the laws of the province of British Columbia on May 20, 1993;
the Appellant was registered under Part IX of the Excise Tax Act (the “Act”) effective May 31, 1993, and assigned a GST Registration number 135489797;
518132 BC Ltd. is a company that was incorporated pursuant to the laws of the province of British Columbia;
the Appellant is involved in the construction industry;
the Appellant and 518132 BC Ltd. formed a joint venture (the “Joint Venture”) to buy and renovate two old houses and sell them, and build two new residential houses;
the Appellant is the operator of the Joint Venture pursuant to section 273 of the Act;
the Appellant was required to file GST returns on a monthly basis;
on May 14, 1996, the Appellant purchased a property (the “Property”) having a civic address of 347 Foul Bay Road, Victoria, British Columbia, for a cost of $750,000.00;
the Property was sub-divided into two and given civic addresses of 347 Foul Bay Road (the “First Property”) and 349 Foul Bay Road (the “Second Property”);
the First Property was an empty lot on which the Appellant built a single unit residential complex, and on April 25, 1997, sold it for $480,000.00 including GST of $28,643.00;
although the GST in respect of the First Property was due on the GST return for the period ending April 30, 1997, it was reported on the GST return for the period ending January 31, 1999;
the Second Property, had a building containing five apartments (the “Building”), was strata titled into seven strata lots, A to G, inclusive;
the Building was raised in order to allow the construction of two new residential condominium units in the basement;
the Second Property was strata titled into seven strata lots A to G, inclusive, with strata lots A and B being the newly constructed basement units;
the renovations to strata lots C, D, E, F and G constitute a “substantially [sic] renovation” as defined in subsection 123(1) of the Act;
in 1997, the Appellant sold strata lots A and B of the Second Property for a cumulative amount of $370,000.00, as detailed in Schedule “B”, but did not charge, collect or remit GST on the sales;
in 1997, the Appellant sold strata lots C, D, E, F and G of the Second Property for a cumulative amount of $1,266,500.00, as detailed in Schedule “B”, but did not charge, collect or remit GST on the sales;
on November 8, 1996, the Appellant purchased a house (the “Third Property”) having a civic address of 1600 Hollywood Crescent, Victoria, B.C. for a cost $271,000.00;
the Appellant performed major renovations on the Third Property before selling it on June 30, 1998 for $595,000.00;
the renovations to the Third Property constitute a “substantially [sic] renovation” as defined in subsection 123(1) of the Act;
the Appellant did not charge, collect or remit GST on the sale of the Third Property;
on July 31, 1997, the Appellant purchased a vacant lot (the “Fourth Property”) for a cost of $405,000.00;
the Appellant built a single unit residential complex on the Fourth Property, having a civic address of 430 Beach Drive, Victoria, B.C., and on November 17, 1998, sold it for $850,000.00 including GST of $55,604.48;
although the GST in respect of the Fourth Property was due on the GST return for the period ending November 30, 1998, it was reported on the GST return for the period ending January 31, 1999;
the Appellant claimed as ITC’s the GST paid on the renovation costs of the Second Property;
GST totalling $150,442.06 was under-reported, detailed as follows:
$1,873.84 in respect of upgrades performed on the First Property;
$109,642.99 in respect of the sales of strata lots A to G of the Second Property, as detailed in Schedule “B”; and
$38,925.23 in respect of the Third Property.
under-reported ITC’s totalling $55,680.05 were allowed;
ITC’s in the amount of $17,293.65, in respect of GST New Housing Rebates for strata lots B, D and E, were claimed past the two year limit pursuant to subsections 254(3) and 254(4) of the Act.
ISSUES TO BE DECIDED
The issues in this case are whether:
the renovations performed on the Third Property and strata lots C to G, inclusive, of the Second Property constitute a “substantial renovation” as defined by the Act; and
the supply of strata lots A and B of the Second Property constitute newly constructed residential condominium units.
STATUTORY PROVISIONS RELIED ON
He relies on sections 123, 152, 165, 192, 221, 225, 228, 238, 254 and 296 of the Act, R.S.C. 1985, as amended.
GROUNDS RELIED ON AND RELIEF SOUGHT
He respectfully submits that the supply of strata lots A and B of the Second Property are taxable at the rate of seven percent, as they are new residential condominium units.
He further submits that the renovations by the Appellant to the strata lots C, D, E, F and G of the Second Property constituted a “substantial renovation” of each unit as defined in subsection 123(1) of the Act, and therefore the sale of the strata lots are taxable supplies, pursuant to subsection 123(1) of the Act.
He respectfully submits that the renovations by the Appellant to the Third Property constituted a “substantial renovation” as defined in subsection 123(1) of the Act, and therefore the sale of the property is a taxable supply, pursuant to subsection 123(1) of the Act.
He concedes that the Appellant is entitled to the additional ITC’s in respect of the GST New Housing Rebates in the amount of $17,293.65, as detailed in Schedule “B”, as provided by subsection 296(2.1) of the Act.
He submits that should this Honourable Court find that the properties were not substantially renovated and the supply of the properties not taxable, the ITC claimed and allowed in respect the properties be disallowed.
He further submits that should this Honourable Court find that the properties were not substantially renovated, the Appellant be liable for GST pursuant to section 192 of the Act.
[3] Assumptions 10(a) to (e) were admitted. Assumptions 10(f), (g), (h), (i), (j), (k) and (l) were not refuted; assumptions (q), (r), (s) and (v) are correct; and assumptions (w), (x) and (y) were not refuted.
1600 Hollywood ("1600")
[4] Was 1600 Hollywood Crescent, Victoria, ("1600") substantially renovated by the Appellant as assessed in assumptions 10(s), (t), (u) and (v)? Assumptions 10(s) and (v) are not refuted.
[5] The Court accepts Mr. Thomassen's evidence completely. He only inspected 1600 once, around the time new structural beams were being put into the house. All the old plumbing fixtures were removed and replaced. The roof was raised, a new roof was put on and some walls were changed in that process. A new heating system was installed. A kitchen and island was installed. A new bathroom was added on each of the second floor and the basement. The basement had pads added to its concrete floor for supports. Hardwood was left throughout the house. A 900 square foot garage addition was added which is pictured with a deck on top (Exhibit A-4).
[6] Virtually all of the interior walls on the second floor of 1600 were changed, although it remained bedrooms and bathrooms. On the main floor a family room was added over the new garage, but aside from that the rooms remained generally similar. In the basement the rooms remained more or less the same except for the garage addition. Thus the very major changes were the entire second floor and the garage, deck and family room additions, the kitchen work and the added bathrooms. The second floor work constitutes renovations to one-third of the house. The two new bathrooms constitutes renovations as does the work in the kitchen. The roof was changed completely when it was essentially removed and replaced. The supports for the interior walls were replaced with the beams that Mr. Thomassen saw and one half of the rear external wall on the main floor and over one half of the external walls on the second floor were new when the Appellant was finished.
[7] The definition of "substantial renovation" in subsection 123(1) of the Excise Tax Act reads:
“substantial renovation” of a residential complex means the renovation or alteration of a building to such an extent that all or substantially all of the building that existed immediately before the renovation or alteration was begun, other than the foundation, external walls, interior supporting walls, floors, roof and staircases, has been removed or replaced where, after completion of the renovation or alteration, the building is, or forms part of, a residential complex;
Thus the new additions, the new roof and the redone or new exterior walls and the new support beams are not to be considered. However the entire second floor was added to and redone and the bathrooms and kitchens were redone. All of the fireplaces were converted to gas and some carpeting was installed. These are counted as renovations. But substantial means that "essentially" or "really" all of the residential complex that is to be considered was replaced. In the Court's view that is not so in respect to 1600. The additions are not replacements and the roof, support beams and exterior wall work and landscaping are not to be counted within the definition. For these reasons, the Appellant's work on the third property does not constitute a substantial renovation.
[8] Section 192 of the Excise Tax Act (after April 1, 1997) reads:
For the purposes of this Part, where in the course of a business of making supply of real property a person renovates or alters a residential complex of the person and the renovation or alteration is not a substantial renovation, the person shall be deemed
(a) to have made and received a taxable supply, in the province in which the complex is situated and at the earlier of the time the renovation is substantially completed and the time ownership of the complex is transferred, for consideration equal to the total of all amount each of which is an amount in respect of the renovation or alteration (other than an amount of consideration paid or payable by the person for a financial service or for any property or service in respect of which the person is required to pay tax) that would be included in determining the adjusted cost base to the person of the complex for the purposes of the Income Tax Act if the complex were capital property of the person and the person were a taxpayer under that Act; and
(b) to have paid as a recipient and to have collected as a supplier, at that time, tax in respect of the supply, calculated on the total determined under paragraph (a).
[9] Therefore section 192 applies to the Appellant who in the course of a business of making supplies of real property renovated or altered 1600 Hollywood Crescent.
349 Foul Bay Road (“349”)
[10] The Second Property, 349 Foul Bay Road (“349”) was the subject of extensive testimony. 347 was the number of the original property purchased. 347 was subdivided and a new house was built using that address. The remaining legal title and the house on it was numbered 349. The Appellant then stratified 349 into seven legal titles. However, on the evidence, the house did not consist of five apartments before it was developed into seven condominium units. Rather, it was an old house that had been turned into a nursing home in about the 1950's, at which time bathrooms had been added. Because it was designed and owned by Mr. McClure, one of Victoria's early architects, it was listed as a Heritage Building in Victoria. Essentially, this meant that its exterior had to be preserved, as did its "footprint". It had many leaded and stained glass exterior windows, which were preserved. The basement was dug deeper to create a higher ceiling in the old basement so that A and B could be build there. The supporting structural walls were retained as were the plumbing stacks. The old wiring which appears to have been renewed in the 1950's was retained and added to. Some new fireplaces were built. The roof was changed and rebuilt for the upstairs condominiums and a new area and roof deck were added. Walls and fixtures were added and fire walls were created between the condominiums by cladding existing walls or adding walls. The floors were retained.
[11] Thus 349's foundation, exterior walls, interior supporting walls, and floors were retained. The square footage of the top floor addition and deck is not in evidence, but it is small compared to the overall original floor space. The exterior of the roof is new and some portions were changed to allow for full height walls on the top floor. The original main staircase was revised extensively in order to install an elevator. Thus it is correct to say that the original roof and staircase were removed and replaced, both structurally and cosmetically.
[12] What remained was a "residential complex". But instead of one title, there were seven titles and seven new homes.
[13] On the evidence, the entire basement was gutted and replaced by Suites A and B.
[14] The main floor was turned into Suites C and D, each with two bathrooms and a kitchen. So far as possible the fascia and two original fireplaces were retained but on such evidence as there is, the kitchens were placed in new locations, one bathroom in C was in a new location and the bathrooms in D may have used the existing stack.
[15] The second floor became suites E and F. F's kitchen used an old plumbing stack, and its bathroom used the same stack as D. E's kitchen stack appears new, but its bathrooms used C's stacks.
[16] G on the top floor appears to be virtually new interior construction using only the pre-existing fireplace unit, the floor joists and part of the floor and part of the roof joists.
[17] In dealing with the work done, the Court accepts the evidence of Mr. Ray Thomassen completely. He inspected 349 for the City of Victoria and he is independent of both parties. He testified that A and B are new. On the main and second floors, suites C, D, E and F required stripping the walls and ceilings; fire insulation and new drywall in the ceilings; some walls removed and some new walls were built and extra cladding was installed on what became the party walls. On the main floor new beams were added and the master bedroom of each suite enlarged. On the second floor E required a new dining room; a kitchen wall out, and a drop ceiling in. F required a fireplace removed, the master bedroom wall deleted and a second bedroom and closet. F also required new ceiling joists throughout the living room and dining room for the top floor deck. The elevator was new. The top floor ("G") had a wall out for the master bedroom, a new deck, new joists above one bedroom and new framing around the elevator.
[18] Mr. Seabrook tendered elaborate calculations, but the fact is that the renovations to suites C, D, E, F and G were substantial, beyond the definition of "substantial renovation", they required work done to the original roof which was reclad and raised in some areas, work done to the original stairway and excavation in the basement in addition to all the other work.
[19] Substantial money was spent on landscaping which was not work on the 349 building. The Court accepts Mr. Seabrook's testimony that it cost $105,973.47 plus labour, which the Court fixes at one-half of $50,000. The remaining one-half of Mr. Seabrook's $50,000 total labour estimate is allocated by the Court to labour in the exterior of the building. The sum of $24,100 calculated for exterior building materials by Mr. Seabrook is also accepted. The total for all of these then is $180,072.47 (Exhibit A-6). In the Court's view, this sum is to be allocated equally among the condominium units.
[20] The Court finds that Units A and B in the basement were new residential condominium units. The ceilings and rooms of these units had to be constructed as a new building except for exterior cladding in the old main floor which thereby amounted to shingles or some similar covering; the same can be said respecting the exterior walls as they related to the old foundation walls. Everything else was new. Therefore paragraph 13 of the Reply is accepted as true and these assessments are correct except insofar as a recalculation may be required due to paragraph [13] of these Reasons for Judgment.
[21] The Respondent treated each of C, D, E, F and G as a "substantial renovation" pursuant to subsection 123(1). The Court finds that the Appellant's evidence did not refute this assumption and therefore, as set out in paragraph 14 of the Reply their sales constitute taxable supplies pursuant to subsection 123(1) of the Act and subject to the findings of this Court contained in paragraph [13] of these Reasons.
[22] The assessments in question are referred to the Minister for reconsideration and reassessment accordingly.
Signed at Ottawa, Canada, this 27th day of April, 2001.
"D. W. Beaubier"
J.T.C.C.