Date: 20011022
Dockets: 1999-3571-GST-I,
1999-4869-GST-I
BETWEEN:
SUN VALLEY MALL LTD. (SVM),
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor Judgment
Beaubier, J.T.C.C.
[1] These appeals pursuant to the Informal Procedure were heard together on common evidence at Kelowna, British Columbia on October 4th and 5th, 2001 by consent of the parties. Lynn Spraggs, President of the Appellant testified for the Appellant. George Ward an officer of Canada Customs and Revenue Agency and a real estate appraiser testified as an expert witness for the Respondent.
[2] Appeal number 1999-3571(GST)I is for the periods July 1, 1994 to June 30, 1997 on the self-supply of 18 residential condominium units and alleges Goods and Services Tax ("GST") due of $129,947.75 and interest and penalties. Appeal number 1999-4869(GST)I is for the periods September 1, 1997 to March 31, 1998 on the self-supply of 5 of the aforesaid 18 residential condominium units and alleges GST due of $18,216.66 and interest and penalties.
[3] Paragraphs 14 to 16 inclusive and Schedule 1 of the Reply to Amended Notice of Appeal number 1999-3571(GST)I read:
14. In so reassessing the Appellant by Notice of Reassessment dated May 6, 1999 to add GST in the amount of $6,039.27 and assess interest and penalties the Minister relied on the following assumptions:
a) the Appellant is a GST registrant with GST Registration No. 13001 8906;
b) the Appellant was a corporation involved in property management;
c) the Appellant is required by the Excise Tax Act, R.S.C. 1985, c. E-15, as amended (the "Act") to file its GST returns on a quarterly basis;
d) the Appellant owned and operated a building which contained 46 strata units consisting of 28 commercial units and 18 residential units;
e) on or about April 25, 1995, a fire destroyed the building;
f) the Appellant reconstructed the building from insurance proceeds;
g) the Appellant was the builder of the building containing the 18 residential condominium units;
h) the reconstruction of the building containing the 18 residential condominium units was completed by October 31, 1996;
i) in its returns for the quarter ending December 31, 1996 and March 31, 1997, the Appellant reported GST in respect of the self-supply of the reconstructed residential condominium units in the total amount of $26,475;
j) Five of the 18 residential condominium units were not rented until after June 30, 1997;
k) the residential condominium units were occupied as set out in Schedule 1 attached hereto;
l) the GST reported by the Appellant was not calculated on the fair market value of the residential condominium unit at the date of occupancy;
m) the fair market value of the residential condominium units at the date of occupancy was not less than the values set out in Schedule 1 attached hereto;
n) the total amount of GST payable by the Appellant in respect of the self-supply of the residential condominium units occupied during the period from July 1, 1994 to June 30, 1997 was not less than $31,385.
o) the Appellant was not duly diligent in preparing its GST returns for the quarters ending December 31, 1996 and March 31, 1997 and failed to remit or pay tax as required under Part IX of the Excise Tax Act;
B. ISSUES TO BE DECIDED
15. The issues are:
a) whether the Appellant is liable for GST as assessed;
b) whether the Appellant is liable for penalties assessed pursuant to subsection 280(1);
c) whether this Honourable Court has jurisdiction to grant the relief claimed by the Appellant in respect of its allegation that collection action taken by the Minister in respect of the GST assessed violate the Appellant's rights under section 8 of the Canadian Charter of Rights and Freedoms (the "Charter"); alternatively
d) Whether collection action taken by the Minister against the Appellant in respect of taxes assessed infringes upon any rights of the Appellant guaranteed by section 8 of the Charter.
C. STATUTORY PROVISIONS RELIED ON
16. He relies on sections 123, subsection 191(1), 280, 300,301,301,306,307,309 313,314,315,316 and 317 of the Act, sections 8 and 1 of the Charter, Section 12 of the Tax Court of Canada Act, and section 18 of the Federal Court Act.
...
SCHEDULE 1
Sun Valley Mall Ltd.
GST account # 130018906
3rd floor residential units - 3334 30th Ave, Vernon, BC
|
Lot # |
Unit # |
unit size |
Nov 1/96 FMV as appraised |
GST @ 7% |
GST reported |
GST Assessed |
Occupancy date mm/dd/yr |
|
27 |
301 |
346.60 |
31208.40 |
2184.59 |
1651.00 |
533.59 |
09/01/96 |
|
28 |
302 |
316.50 |
28498.15 |
1994.87 |
1540.00 |
454.87 |
3/15/97 |
|
29 |
303 |
316.50 |
28498.15 |
1994.87 |
1540.00 |
454.87 |
04/01/97 |
|
30 |
304 |
316.50 |
28498.15 |
1994.87 |
1540.00 |
454.87 |
11/01/96 |
|
31 |
305 |
431.60 |
38861.93 |
2720.34 |
1951.00 |
769.34 |
03/01/97 |
|
32 |
306 |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
|
|
33 |
307 |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
|
|
34 |
308 |
314.30 |
28300.06 |
1981.00 |
1530.00 |
451.00 |
12/01/96 |
|
35 |
309 |
314.30 |
28300.06 |
1981.00 |
1530.00 |
451.00 |
3/24/96 |
|
36 |
310 |
314.30 |
28300.06 |
1981.00 |
1528.00 |
453.00 |
08/01/97 |
|
37 |
311 |
367.10 |
33054.25 |
2313.80 |
1916.00 |
397.80 |
08/01/96 |
|
38 |
312 |
673.80 |
60670.00 |
4246.90 |
1951.00 |
2295.90 |
01/01/96 |
|
39 |
313 |
673.80 |
60670.00 |
4246.90 |
0.00 |
4246.90 |
01/01/98 |
|
40 |
314 |
623.30 |
56122.90 |
3928.60 |
0.00 |
3928.60 |
02/01/98 |
|
41 |
315 |
314.30 |
28300.06 |
1981.00 |
1528.00 |
453.00 |
09/01/96 |
|
42 |
316 |
314.30 |
28300.06 |
1981.00 |
1528.00 |
453.00 |
08/01/96 |
|
43 |
317 |
314.30 |
28300.06 |
1981.00 |
1528.00 |
453.00 |
09/01/96 |
|
44 |
318 |
639.40 |
57572.57 |
4030.08 |
1738.00 |
2292.08 |
12/17/96 |
|
45 |
319 |
639.40 |
57572.57 |
4030.08 |
1738.00 |
2292.08 |
09/01/97 |
|
46 |
320 |
639.40 |
57572.57 |
4030.08 |
1738.00 |
2292.08 |
10/01/97 |
|
---------- |
------------- |
---------- |
------------- |
------------- |
|||
|
7869.70 |
708600.00 |
49602.00 |
26475.00 |
23127.00 |
[4] Assumption 14 b) was refuted in that the Appellant did not manage the rental and operation of the residential units. The residential units were strata titled on November 1, 1996 and therefore, they were merely residential apartments until that date. The assumptions were not refuted in any other respect except insofar as references to the units described in appeal number 1999-4869(GST)I may apply. The valuations in Schedule 1 are disputed.
[5] Paragraphs 20 to 22 inclusive of appeal number 1999-4869(GST)I corresponds successively with the quoted paragraphs of appeal number 1999-3571(GST)I except for assumptions 20 n) and o) and paragraph 22 which read:
20 n) the total amount of GST payable by the Appellant in respect of the self-supply of the residential condominium units occupied during the period from September 1, 1997 to March 31, 1998 was not less than $18,216;
o) the Appellant was not duly diligent in preparing its GST returns for the period from September 1, 1997 to March 31, 1998 and failed to remit or pay tax as required under Part IX of the Excise Tax Act;
C. STATUTORY PROVISIONS RELIED ON
22. He relies on sections 123, subsection 191(1), 280, 300, 301, 302, 306, 313, 314, 315, 316 and 317 of the Act, sections 8 and 1 of the Charter, Section 12 of the Tax Court of Canada Act and Section 18 of the Federal Court Act.
[6] The Appellant was the builder in this case. Lynn Spraggs, its chief officer, has a Ph.D in civil engineering. He is a mature experienced man who is highly qualified and experienced in construction engineering and costs. He supervised the construction of the entire complex. The Appellant let separate contracts for the various aspects of construction to a number of contractors for, separately, the structure, the electrical components, the plumbing, etc. It is a multi-use commercial and residential building which was reconstructed on the old site. The old building was destroyed by the fire and rebuilt by the Appellant to approximately its former design from the ground up under the Appellant's contracts and supervision pursuant to the Appellant's plans. Thus, the Appellant is the builder of the entire building and the residential units in question within the meaning of Section 191 of the Excise Tax Act ("Act").
[7] The Appellant proceeded to strata title the residential suites in the latter half of 1996. The plan was registered on November 1, 1996. Thus, it was, as Bowman, J. stated in Stafford, Stafford & Jakeman v. The Queen, [1995] G.S.T.C. 7, intended to be strata titled into individual units throughout October of 1996, and the GST should be imposed pursuant to subsection 191(1) of the Act upon the units as the restoration of single unit residential complexes as at the later of times of completion or occupancy is described in the respective assumptions pursuant to subsection 191(1) of the Act. The values of the units for assessment purposes are to be apportioned among the units in each appeal in accordance with the proportions respecting each of the units as appraised and described in the assumptions contained in the Replies to the Amended Notices of Appeal.
[8] The substantial question of the values of the units under appeal turned on the Appellant's valuation of the 18 units at 25% of the cost of construction of the entire mixed use building, the 25% amounting to $524,000. The Appellant's value did not include the cost or value of land. The Appellant's failure to include a land value is fatal to its cost calculation. Subsequently, the Appellant arrived at a second valuation of $409,089 by multiplying the net income figure of $57,272 by a capitalization factor of 14%.
[9] In contrast, the Appellant's appraiser based his valuation as at November 1, 1996, on a "direct sales comparison approach" to reach a value of $708,600. In the Court's view this direct sales approach fails because all of the appraiser's comparables had parking, whereas the residential units in the subject property did not. Moreover, none of the comparables consisted of units in a mixed use building.
[10] Thus, both the Appellant's interpretation of the cost of the units is rejected and the Respondent's use of the comparable sales test to value the units is rejected. The only accepted evidence relates to the income approach to value the units.
[11] The Appellant failed to include the income from the washers and dryers in his calculation of the total income and on the evidence on the record before the Court, it should be included. The Respondent's appraiser included an estimate of that income at $3,000 which is accepted by the Court. The appraiser also estimated a vacancy factor of 5.5% based on Canada Mortgage and Housing Corporation figures for the Vernon area, where the units are situated. The Appellant did not allow for a vacancy factor but did state that one of the units seldom rented. In these circumstances, the appraiser's calculation of the income from the units is accepted in its entirety since the evidence before the Court and the appraiser's explanations confirms it. His final estimate of the units net operating income was $56,400, which is accepted as described on page 22 of his report (Exhibit R-3).
[12] As a result, they are close, but for the reasons stated, Mr. Ward's is accepted as the more accurate. Mr. Ward applied a 9% capitalization rate to the net income figure of $56,400 in order to arrive at a value for the units of $626,700 based upon the income approach.
[13] The Respondent's appraiser was of the view that the capitalization rate should be lower for the subject property than the rate for comparables 2 and 3 because they were not strata titled and because the subject property was new. However, the subject suites were either bachelor or one bedroom suites with bedrooms on the upper floor in the case of the one bedroom suites; these factors would limit the saleability of the subject units and, in the Court's view, reduced their values in comparison to the comparables. The subject units are downtown, but they are near competitors' subsidized units which thereby restrict both their saleability and their income potential. The actual construction of the residential units was not given in detailed evidence. However, any discrepancies between the parties basis of arriving at an income of the units are eliminated by the closeness of their final figures.
[14] The Respondent's appraiser reported that a lower rental rate reduces the vacancy rate and thus lowers the capitalization rate, however, the Court discounts that view, particularly due to the timing of sales 2 and 3. Thus, the Court does not accept the appraiser's capitalization rate at 9%. The 9% rate derives from his comparable sales number 1, in 1995; number 4, in 1992; number 5, in 1992; and number 6, in 1992. By contrast, the rates for sale number 2, in February, 1997 and number 3, in January 1996, are 12.09% and 12.66%, respectively. They average 12.375%. The Appellant offered no comparable source from which his capitalization rate of 14% could be verified and as a result, his rate of 14% is rejected. The Court finds the capitalization rate to be applied is 12.375% because sales 2 and 3 most closely associate themselves with the date in question near the end of 1996.
[15] Using a capitalization rate of 12.375% and Mr. Ward's income figure of $56,400, the Court finds the value of the units to be $455,758.
[16] The Appellant raised a number of other issues in his Notices of Appeal over and above value and the applicability of the GST to the premises. They include the Canadian Charter of Rights and Freedoms ("Charter"); errors by the auditor; and the question of due diligence respecting penalties. They will be dealt with in that order.
[17] The Charter argument was based on the fact that the Appellant's bank accounts were attached shortly after assessment when that assessment included an auditor's error of $30,000 which related to a completely separate corporation. The Appellant spent about one month of staff time with little or no operating money discovering where the error was and correcting the auditor. The Appellant quite properly takes the position that errors such as this can be based on prejudice or erroneous work by an auditor and that seizure without an independent review could destroy a taxpayer or a taxpayer's business with no recourse by the taxpayer. The Appellant's suggestions are correct and there is no evidence contrary to his allegations concerning the auditor's error and the collection proceedings which followed; they are accepted as being true and factual. However, the Charter does not affect property rights so that, even though such collection action could destroy a person's livelihood, there is no remedy available to the Appellant under the Charter. Furthermore, this Court does not have jurisdiction over the Respondent's collection procedures according to the existing jurisprudence. In these circumstances, the Court is unable to provide the Appellant with an appropriate remedy respecting these actions by the Respondent. (See Steve Tatarnic v. The Queen, (TCC) [1997] G.S.T.C. 54 and The Queen v. Robert Duncan et al, (F.C.C.) 91 DTC 5615.
[18] The Appellant alleges that it exercised due diligence in its reporting and valuation procedures respecting these assessments. The chief officer of the Appellant is a man who appears to be in his sixties. He has a Ph.D in Civil Engineering from Stanford University and he was a professor of civil engineering at McGill University where he taught construction project management and cost engineering among other things. He testified and argued for the Appellant and he is a very competent and a very sophisticated man in every respect. He testified that his wife compiled some of the Appellant's figures for accounting and taxation purposes but he was the person who gathered them, managed them and was the Appellant's officer who was responsible for submitting its reports to the Respondent. In this case, the Appellant failed to properly report the supply of the residential units pursuant to Section 191 of the Act in its initial filing. It only did so after it was contacted by the Respondent. There is no evidence that the Appellant attempted to comply with the Act until it was asked to do so by the Respondent's officers. Its subsequent report and valuation left the land value out of its calculations. This was a large and sophisticated project and supply both in real terms and relative to the size and operations of the Appellant itself. There is no evidence that the Appellant consulted its lawyers or accountants respecting the appropriate reports necessary under the Act or that it consulted the Respondent's officers or advisory services. In these circumstances, the Appellant has failed to exercise due diligence pursuant to the provisions of the Act, and the penalties and the interest are applicable as levied, based upon the findings herein.
[19] These assessments are referred to the Minister of National Revenue for reconsideration and reassessment in accordance with these reasons.
Signed at Ottawa, Canada, this 22nd day of October, 2001.
"D. W. Beaubier"
J.T.C.C.
COURT FILE NO.: 1999-3571(GST)I
1999-4869(GST)I
STYLE OF CAUSE: Sun Valley Mall Ltd. (SVM) v. The Queen
PLACE OF HEARING: Kelowna, British Columbia
DATE OF HEARING: October 4 & 5, 2001
REASONS FOR JUDGMENT BY: The Honourable Judge D. W. Beaubier
DATE OF REASONS: October 22, 2001
APPEARANCES:
Agent for the Appellant: Lynn D. Spraggs
Counsel for the Respondent: Linda Bell
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
1999-3571(GST)I
BETWEEN:
SUN VALLEY MALL LTD. (SVM),
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on common evidence with the appeals of Sun Valley Mall Ltd. (SVM) (1999-4869(GST)G) on October 4, 2001 at Kelowna, British Columbia
by the Honourable Judge D. W. Beaubier
Appearances
Agent for the Appellant: Lynn D. Spraggs
Counsel for the Respondent: Linda Bell
JUDGMENT
The appeal from the assessment made under the Excise Tax Act, notice of which is dated January 15, 1999, and bears number 12260000131, is allowed, and the assessment is referred to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 22nd day of October, 2001.
|
"D. W. Beaubier" |
J.T.C.C.
1999-4869(GST)I
BETWEEN:
SUN VALLEY MALL LTD. (SVM),
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeal of Sun Valley Mall Ltd. (SVM) (1999-3571(GST)G) on October 4, 2001 at Kelowna, British Columbia
by the Honourable Judge D. W. Beaubier
Appearances
Agent for the Appellant: Lynn D. Spraggs
Counsel for the Respondent: Linda Bell
JUDGMENT
The appeal from the assessment made under the Excise Tax Act, notice of which is dated June 9, 1999, and bears number 12260000248, is allowed, and the assessment is referred to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 22nd day of October, 2001.
|
"D. W. Beaubier" |
J.T.C.C.