Date: 20000613
Docket: A-524-98
CORAM: DÉCARY J.A.
ROTHSTEIN J.A.
SHARLOW J.A.
BETWEEN:
HIDDEN VALLEY GOLF RESORT ASSOCIATION
Appellant
- and -
HER MAJESTY THE QUEEN
Respondent
Heard at Calgary, Alberta on Wednesday, May 3, 2000
JUDGMENT delivered at Ottawa on Tuesday, June 13, 2000
REASONS FOR JUDGMENT BY: SHARLOW J.A.
CONCURRED IN BY: DÉCARY J.A.
ROTHSTEIN J.A.
Date: 20000613
Docket: A-524-98
CORAM: DÉCARY J.A.
ROTHSTEIN J.A.
SHARLOW J.A.
BETWEEN:
HIDDEN VALLEY GOLF RESORT ASSOCIATION
Appellant
- and -
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
SHARLOW J.A.
The Appellant holds a leasehold interest in property approximately 60 miles from Calgary that includes residential lots, a nine hole golf course, a tennis court, and an artificial lake. The residential lots were sublet in 1977 for a term ending in 2013, and vacation cottages have been constructed on the lots. Although residential rents are not are subject to the goods and services tax (GST) imposed by the Excise Tax Act, R.S.C. 1985, c. E-15, as amended, in this case the Crown has taken the position that some amounts payable under the subleases are subject to GST. The Crown's position was upheld by the Tax Court of Canada: [1998] G.S.T.C. 95, (T.C.C.), [1998] T.C.J. No. 718 (QL). The Appellant now appeals to this Court.
By virtue of subsection 165(1) of the Excise Tax Act, GST is payable by the recipient of a "taxable supply". The terms "supply" and "taxable supply" are defined as follows in subsection 123(1):
| "supply" means [...] the provision of property or a service in any manner, including sale, transfer, barter, exchange, licence, rental, lease, gift or disposition. "taxable supply" means a supply that is made in the course of a commercial activity. |
"fourniture" [...] livraison de biens ou prestation de services, notamment par vente, transfert, troc, échange, louage, licence, donation ou aliénation. "fourniture taxable" Fourniture effectuée dans le cadre d'une activité commerciale. |
The term "commercial activity", which is part of the definition of "taxable supply", is defined in subsection 123(1). The relevant part of that definition reads as follows:
| "commercial activity" of a person means [...] |
"activité commerciale" Constituent des activités commerciales exercées par une personne: [...] |
| (c) the making of a supply (other than an exempt supply) by the person of real property of the person, including anything done by the person in the course of or in connection with the making of the supply. |
c) la réalisation de fournitures, sauf des fournitures exonérées, d'immeubles appartenant à la personne, y compris les actes qu'elle accomplit dans le cadre ou à l'occasion des fournitures. |
| The term "exempt supply"is defined as follows at subsection 123(1): |
| "exempt supply" means a supply included in Schedule V . |
"fournitures exonérées" Fourniture figurant à l'annexe V. |
| Within the list of exempt supplies in Part I of Schedule V to the Excise Tax Act are a number of supplies relating to real property. In this case the relevant provision is section 7 of Part I of Schedule V, which reads in part as follows: |
| 7. A supply
but not including any land on which the residential unit [...] is or 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 [...] as a place of residence for individuals. |
7. La fourniture:
Le présent article ne s'applique pas au fonds sur lequel l'habitation [...] est fixé ou installé, ou doit l'être, ni au fonds contigu à ce fonds, qui n'est pas raissonnablement nécessaire à l'utilisation de l'habitation [...] à titre résidentiel. |
||||
| It was argued for the Crown, though not strenuously, that because the GST is intended to be a broadly based tax, its objectives will be frustrated unless the exemptions are narrowly construed. I do not accept this argument. In Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536 at 578, Estey J. said that the only correct approach to the interpretation of statutes, including taxing statutes, is reflected in this statement by E.A. Driedger, Construction of Statutes, 2d.ed. (Toronto: Butterworths, 1983) at 87: |
| Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament. |
This statement has been repeated by the Supreme Court of Canada on numerous occasions since 1984. This approach necessarily excludes any general rule that exemptions in a taxing statute must be construed strictly against the taxpayer.
It is undisputed that the residential lots on the Appellant's property are "land" within the meaning of this provision, and that they are no larger than reasonably necessary for the use and enjoyment of the vacation cottages as places of residence. Thus, the Appellant's "supply" of each lot by way of sublease is an "exempt supply", and the consideration paid for the right to use and occupy a lot is not subject to GST.
However, the Crown argues that the tenants are also being supplied something other than the vacation lots, with the result that GST is payable on the consideration paid for that other supply. The Tax Court Judge concluded that the Crown's position was correct. For the reasons that follow, I must respectfully disagree.
To understand the Crown's position, it is necessary to consider the terms of a typical sublease. In addition to granting the tenant an exclusive right to a lot on which a vacation cottage could be built, the sublease gives the tenant the right to use the golf course, club house, artificial lake and tennis court on the remainder of the Appellant's leasehold property without paying a fee for each use. The evidence at trial indicates that the golf course and club house are also made available to the public for a fee, on which GST is collected and paid.
The sublease requires the payment of rent consisting of a number of components. One is referred to as the "annual rent" which was paid in full in 1977 when the sublease was granted. Another is referred to as a "maintenance fee" which is payable annually. Under the sublease, failure to pay the "maintenance fee" component of the rent is a default under the lease entitling the Appellant to take possession of the lot.
All amounts payable by the tenant under the sublease are referred to as "rent", and for present purposes it is convenient to use that terminology. There may or may not be an issue as to whether the term "rent" correctly describes all the payments required by the sublease. That is not a debate that must be resolved in this case. It is common ground that the incidence of GST does not depend on mere nomenclature.
The amount of the "maintenance fee" component for a particular period depends upon the costs incurred by the Appellant in that period in providing all the services for which it is responsible. The manner in which the amount of the maintenance fee is determined indicates that it is intended to provide the Appellant with enough money from the tenants to pay the costs the Appellant incurs in fulfilling all of its continuing obligations under the subleases, including the cost of security, water, lighting, roadways and garbage collection for the entire property, and the cost of maintaining the golf course and other recreational facilities, as well as overhead and capital costs and a stipulated markup.
I summarize the Appellant's principal argument as follows. There is only one legal relationship between the Appellant and the tenants " landlord and tenant " and only one legal character for the payments passing from the tenants to the Appellant " rent. All components of the rent as stipulated in the lease are payable for the right to use and occupy the lot. While the sublease gives the tenants rights in addition to the right to use and occupy the lot, it does not stipulate any separate consideration for those rights. Therefore, there is no basis in law to conclude that any consideration is being paid for those rights, and therefore no GST obligation can arise.
In response, the Crown argues that the Appellant is supplying each subtenant with a number of things, only one of which is the exclusive right to use and occupy a lot. The subtenants also are given the right to use the recreational facilities, and the right to compel the Appellant to provide certain services. Therefore, it is necessary to allocate rent between the consideration for the right to use the lot, which is exempt, and the other things, which are not exempt.
Does the Excise Tax Act require an identification of the various obligations of the Appellant as separate supplies and the allocation of the rent among them? The Appellant says no, and points to a principle devised by the U.K. courts in the context of the value added tax. This "single supply rule" has gained general acceptance in the Tax Court in GST cases, notably in O.A. Brown Ltd. v. Canada, [1995] G.S.T.C.40 (T.C.C.), [1995] T.C.J. No. 678 (T.C.C.), a decision of Rip T.C.J. The validity of the principle is accepted by the Crown (Supplementary Submissions of the Respondent filed May 23, 2000, paragraph 6), but its application to this case is not.
Counsel for the Crown argues that the single supply rule was not before the Tax Court Judge. I have carefully reviewed the pleadings in the Tax Court and the written submissions filed in this appeal. I am satisfied that in both the Tax Court and in this Court the issues are stated in terms that are sufficiently broad to put the Crown on notice that the single supply rule could be raised.
The analysis of Rip T.C.J. in O.A. Brown is worth repeating (at 40-6 to 40-9):
| In deciding this issue, it is first necessary to decide what has been supplied as consideration for the payment made. It is then necessary to consider whether the overall supply comprises one or more than one supply. The test to be distilled from the English authorities is whether, in substance and reality, the alleged separate supply is an integral part, integrant or component of the overall supply. One must examine the true nature of the transaction to determine the tax consequences. The test was set out by the Value Added Tax Tribunal in the following fashion [Dyrham Park Country Club v. Customs and Excise Commissioners, [1978] V.A.T.T.R. 244 (U.K.) at 252]: |
| In our opinion, where the parties enter into a transaction involving a supply by one to another, the tax (if any) chargeable thereon falls to be determined by reference to the substance of the transaction, but the substance of the transaction is to be determined by reference to the real character of the arrangements into which the parties have entered. |
| One factor to be considered is whether or not the alleged separate supply can be realistically omitted from the overall supply. This is not conclusive but is a factor that assists in determining the substance of the transaction. The position has been framed in the following terms [Mercantile Contracts Ltd. v. Customs & Excise Commissioners, File No. LON/88/786, U.K. (unreported)]: |
| What should constitute a single supply of services as opposed to two separate supplies, is not laid down in express terms by the value added tax enactments. It would therefore be wrong to attempt to propound a rigid and precise definition lacking statutory authority. One must, it seems to us, merely apply the statutory language, interpreting its terminology, so far as the ordinary meaning of the words allows, with the aim of making the statutory system of value added tax a practical workable system. For this purpose one should look at the degree to which the services alleged to constitute a single supply are interconnected, the extent of their interdependence and intertwining, whether each is an integral part or component of a composite whole. Whether the services are rendered under a single contract, or for a single undivided consideration, are matters to be considered, but for the reasons given above are not conclusive. Taking the nature, content and method of execution of the services, and all the circumstances, into consideration against the background of the value added tax system, particularly its methods of accounting for and payment of tax, if the services are found to be so interdependent and intertwined, so much integral parts or mere components or items of a composite whole, that they cannot sensibly be separated for value added tax purposes into separate supplies of services, then Parliament, in enacting the value added tax system, must be taken to have intended that they should be treated as a single system, otherwise, they should be regarded for value added tax purposes as separate supplies. |
| The fact that a separate charge is made for one constituent part of a compound supply does not alter the tax consequences of that element. Whether the tax is charged or not charged is governed by the nature of the supply. In each case it is useful to consider whether it would be possible to purchase each of the various elements separately and still end up with a useful article or service. For if it is not possible then it is a necessary conclusion that the supply is a compound supply which cannot be split up for tax purposes. |
| In the appeal of Customs and Excise Commissioners v. Scott [[1978] S.T.C. 191 (U.K.)], a decision of the English Queen's Bench Division, the issue was not dissimilar to that in the appeal at bar. Mr. Scott farmed some 170 acres of grassland. His activities as a farmer included keeping two stallions at stud and entering into contracts with the owners of mares to have them serviced at the stud by the stallions. Each contract imposed on the taxpayer the following obligations: to provide the appropriate number of services by the stallion and tests to achieve a pregnancy, to accommodate the mare for the required number of weeks, to feed the mare during that period, to look at the mare each day to observe whether all was well, to call in the owner or a veterinary surgeon if trouble was observed and to take first aid measures in an emergency and to observe the duties imposed on a common law bailee for reward. Each contract required the owner of the mare to pay a fee of "100, an additional weekly charge for each week that the mare was accommodated at the stud and any veterinary surgeon's charges. Whilst at the stud the mares were kept in a field and fed on the growing grass. In assessing the taxpayer's liability to value added tax the tribunal treated his obligations under each contract as constituting a number of different supplies, i.e. the supply of accommodation for the mare, the supply of food, i.e. the grass, and the supply of skilled care, and assessed to tax separately the consideration applicable to each of those supplies. Accordingly, they held that that part of the weekly charge payable by the owner of the mare which was attributable to the supply of feeding stuffs fell to be zero- rated. |
| The Crown appealed. Cumming-Bruce, LJ referred to the judgment of Lord Denning MR in British Railways Board v. Customs and Excise Commissioners [[1977] 2 All E.R. 873 (U.K.) at 876] as the starting point in considering the state of authorities: |
| I come back to the real question in this case: what did the board supply in consideration of the "1.50 they received? Did they supply transport by rail, or only an option to buy tickets? To my mind they supplied transport by rail; and the "1.50 was part-payment for it. It is not correct to separate the "1.50 as if it was a separate payment for some separate service, separate from the travel by rail. The "1.50 is really part and parcel of the payment which the student makes for travelling on the railway. |
| Cumming-Bruce LJ, then asked a simple question: what did the taxpayer supply in consideration of the money that he charged the client per week in respect of the keep of the mare in respect of the service that he provided? [Scott, at 194]? The answer, as a matter of common sense, was that he had supplied the keep of the mare for the period she was at the stud, and although that involved the fulfilment of each of the obligations under the contract, those obligations, which were the necessary components of the entire transaction, constituted the supply of one service, i.e. the service of keeping the mare. |
| Lord Widgery CJ, stated "that it is to hope when answering Lord Denning MR's question in the future in this type of case people do approach the problem in substance and reality". He added [at 195]: |
| ... I think it would be a great pity if we allowed this subject to become over-legalistic and over-dressed with legal authorities when, to my mind, once one has got the question posed, the answer should be supplied by a little common sense and concern for what is done in real life.... |
| Turning to the facts in the present appeal, it remains to be determined what has been supplied in return for the consideration paid. By virtue of subsec. 123(1) of the Act the supply of livestock is zero-rated [...]. |
| [...] |
| The appellant buys livestock according to the instructions of its customers. It subsequently supplies the livestock to each customer as ordered. In the course of providing this service the appellant incurs the cost of feed, inoculation, transportation and insurance. The appellant seeks reimbursement of these costs and charges a fee for this service. It is difficult to isolate these buying activities as being distinct supplies, independent of the whole activity. Only if taken together do they form a useful service. In substance and reality, the alleged separate supply, that of a buying service, is an integral part of the overall supply, being the supply of livestock. The alleged separate supplies cannot be realistically omitted from the overall supply and in fact are the essence of the overall supply. The alleged separate supplies are interconnected with the supply of livestock to such a degree that the extent of their interdependence is an integral part of the composite whole. The services are rendered under a single contract, for a single consideration, albeit the invoice is itemized. The appellant is making a single supply of livestock and the commission and disbursements charged are part and parcel of the consideration for that supply. They do not amount to separate supplies. This is simply a matter of common sense. No GST is collectible on the commission charged and the disbursements. |
The same reasoning has been applied in a number of other Tax Court cases: Oxford Frozen Foods Ltd. v. Canada, [1996] G.S.T.C. 76 (T.C.C.), [1996] T.C.J. No. 1222 (T.C.C.), Club Med Sales Inc. v. Canada, [1997] G.S.T.C. 28 (T.C.C.), [1997] T.C.J. No. 294 (T.C.C.), Winnipeg Livestock Sales Ltd. v. Canada, [1998] G.S.T.C. 87 (T.C.C.), [1998] T.C.J. No. 681 (T.C.C.), Camp Kahquah Corp. Ltd. v. Canada, [1998] G.S.T.C. 100 (T.C.C.), [1998] T.C.J. No. 807 (T.C.C.), Sterling Business Academy Inc. v. Canada, [1998] G.S.T.C. 130 (T.C.C.), [1998] T.C.J. 1106 (T.C.C.).
I am prepared to infer from the terms of the subleases, the location of the lots at a significant distance from Calgary, and their intended use as vacation properties, that the tenants would be unlikely to have agreed to the subleases if they did not contain stipulations for the various services and access to the recreational facilities. For the same reason, I am prepared to infer that the recreational facilities would not attract many customers apart from the tenants.
With these considerations in mind, and applying a common sense appreciation to the facts, I must ask this: what did the Appellant supply to the subtenants in return for the payments they made? The only sensible answer is that the Appellant supplied the subtenants with vacation lots. The Appellant's lots may have been more attractive than other lots because of the free access to nearby recreational facilities, but the root of the transaction is a long term residential lease. I must conclude that, unless there is some provision of the Excise Tax Act that dictates a contrary result, none of the amounts paid to the Appellant under the subleases are subject to GST.
It is argued for the Crown that there are two provisions that could be read as requiring a contrary result. One is found in the closing words of section 7 of Part I of Schedule V, which lists "exempt supplies". I repeat the section for ease of reference:
| 7. A supply
but not including any land on which the residential unit [...] is or 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 [...] as a place of residence for individuals. |
7. La fourniture:
Le présent article ne s'applique pas au fonds sur lequel l'habitation [...] est fixé ou installé, ou doit l'être, ni au fonds contigu à ce fonds, qui n'est pas raissonnablement nécessaire à l'utilisation de l'habitation [...] à titre résidentiel. |
| The closing words of section 7 have no application in this case. The subleases do not give the tenants continuous use or possession of any land except the residential lots, and the Crown has agreed that the lots are not larger than reasonably necessary for the use and enjoyment of the vacation homes on the lot as places of residence. |
| Counsel for the Crown also referred to subsection 136(2) of the Excise Tax Act which reads as follows: |
| (2). For the purposes of this Part, where a supply of real property includes the provision of
the property referred to in paragraph (a) and the property referred to in paragraph (b) shall each be deemed to be a separate property and the provision of the property referred to in paragraph (a) shall be deemed to be a separate supply from the provision of the property referred to in paragraph (b), and neither supply is incidental to the other. |
(2) Pour l'application de la présente partie, dans le cas où la fourniture d'un immeuble comprend deux catégories de biens, visées respectivement aux alinéas a) et b), les biens de chaque catégorie sont réputés être des biens distincts et être l'objet de fournitures distinctes et aucune des fournitures n'est accessoire à l'autre :
|
The term "residential complex" ["immeuble d'habitation"] is defined in subsection 123(1). The definition is lengthy and I will not reproduce it. It is sufficient to say that the definition is met by a house, the land on which the house is located and the land around the house that is reasonably necessary for the use and enjoyment of the house as a residence.
Unquestionably the subleases are a supply of real property that is a residential complex, so there is a provision of real property that fits within paragraph 136(2)(a). However, subsection 136(2) cannot apply unless there is also a supply of real property that is not part of the residential complex and that fits within paragraph 136(2)(b). The argument of the Crown, as I understand it, is that the rent payable by the subtenants is partly consideration for land (the lots) and partly consideration for something else. I cannot see how the consideration for that other thing can possibly fit within paragraph 136(2)(b) unless the other thing is real property. The subleases do not provide for the supply of anything apart from the lots that meets the definition of "real property". Certainly the rights that counsel for the Crown characterizes as "all aspects of the resort experience" do not fall into that category. It follows that I can see no basis for the application of subsection 136(2) to the facts of this case.
This conclusion seems to me to accord with the language and object of the GST legislation. I note that it is also consistent with the administrative policies adopted by the tax authorities. It is common knowledge that residential leases in apartment complexes frequently include the right to services such as security, water, electricity, cable TV, garbage and snow removal, landscaping, and the right to use recreational facilities such as swimming pools, exercise rooms and tennis courts, without requiring the payment of any amount in excess of the stipulated rent. The material to which we were referred indicates that the tax authorities have never taken the position that GST is payable on any part of the rent for such apartments. The only unusual aspect of the subleases in this case is that the tenants have access to a nine-hole golf course. I am not persuaded that the nature of the recreational facilities in this particular case should put the subtenant in a special category.
Counsel for the Crown raised the spectre of abusive transactions that might be designed by taxpayers in reliance on the conclusion in this case. However, the GST legislation has a broadly worded anti-avoidance provision to deal with such transactions. I note also that the subleases were entered into in 1977, long before the GST legislation was proposed. There can be no question in this case of any attempt to design a transaction to avoid GST.
This appeal should be allowed. The Appellant is entitled to costs in this Court and the Tax Court. The decision of the Tax Court should be set aside and the reassessments under appeal vacated.
Karen R. Sharlow
J.A.
"I agree
Robert Décary J.A."
"I agree
Marshall Rothstein J.A."