Canada: Tax Assistance

Introduction: New Housing GST/HST Rebate

Under subsection 254(2) of the Excise Tax Act ("Tax Act") homeowners can claim a new housing rebate. Using this rebate homeowners can reduce the amount of GST/HST that they pay on new houses. The case at hand revolved around Adelina Simonetta's claim for this new housing rebate. Simonetta purchased a house and lot in Toronto, Ontario, and applied for the rebate. The CRA denied the rebate, which Simonetta challenged before the Tax Court of Canada ("Tax Court"). The Tax Court found in favor of Ms. Simonetta and upheld the eligibility of the house for the rebate.

Background that led to the CRA Denying the New Housing Rebate:

Two individuals, collectively the "Vendors", built the house which Ms. Simonetta purchased. The Vendors bought the property in 2010 with a pre-existing house on it. In 2013, the Vendors acquired a demolition and construction permit. After the subsequent demolition of the old house, they began construction of the new house. From 2015 to 2016 the Vendors listed the property for sale on five times, describing the house as "New" each time.

Adelina Simonetta, her husband, Biagio Simonetta, and their son, Paul Simonetta, were involved in researching and purchasing a property in Toronto, Ontario and found the Vendors' property. Through their research they discovered the above details about the newly constructed house.

Biagio Simonetta was a certified professional accountant and the chief financial officer of a real estate firm. From his and Ms. Simonetta's observations during virtual and in-person tours, the two concluded that the property was not, and had not been, lived in. This was evident to them from changes in sets of furniture between tours, the original packaging was still intact on many appliances and furnishings, and incomplete work around the house, such as the dryer vent not being connected to the exterior vent.

Ms. Simonetta signed an agreement of purchase and sale ("APS") on September 9, 2016, for the property. The APS stated that the price of the Property was $3,158,000. Ms. Simonetta, however, ensured that the agreement contained a clause, which would later be crucial in the Tax Court's ruling, setting out that:

HST: If the sale of the Property (Real Property as described above) is subject to Harmonized Sales Tax (HST), then such tax shall be included in the Purchase Price. If the sale of the Property is not subject to HST, Seller agrees to certify on or before closing that the sale of the Property is not subject to HST. Any HST on chattels, if applicable, is not included in the Purchase Price.

Issues began when the closing of the sale approached. Over correspondence between the Simonettas and the Vendors' lawyer, a disagreement became apparent of the applicability of HST and eligibility of the house for the New Housing Rebate. The Vendors' disagreed that the house could be considered for the rebate due to them having lived in it. Ms. Simonetta argued that the house had not been lived in and was eligible. The Simonettas set out their observations and attempted to cooperate with the Vendors', however the Vendors' solicitor would dismiss their observations and refused to cooperate. Despite this disagreement the sale went ahead with Ms. Simonetta informing the Vendors that she intended to claim the Rebate.

The Simonettas, in December 2016, filed the application for the rebate. Mr. Simonetta completed, and Ms. Simonetta signed, the HST rebate application form, however the form was left partially incomplete. Section D of the application requires the claimant to obtain the builder's information, which given the uncooperative and dismissive behavior of the Vendors' solicitor, Mr. Simonetta was certain that he would not be able to obtain.

Proving Eligibility for the New Housing Rebate: The Tax Court's Decision Credibility

A portion of the Tax Court's decision discussed the credibility of one the Vendors, known as Mr. B. Mr. B was called by the CRA to testify as witness. The court found credibility issues with Mr. B and highlighted several concerns and inconsistencies in Mr. B's statements and actions. This included misrepresentations by the Vendors' Solicitor who, on behalf of Mr. B and the other Vendor, made statements in a letter that misrepresented facts about the property to the Simonettas. Additionally, Mr. B's testimony contains several instances where he appeared to have an inaccurate recollection of events, and Mr. B admitted to removing provisions from a Forbearance Agreement resulting in an incomplete version initially provided to the court. These facts thus impacted the Tax Court's assessment of Mr. B's testimony compared to the Simonettas. Next the court turned to discussing whether the property was eligible for the Rebate, which began with whether it was considered a 'taxable supply.'

Taxable Supply

Subsection 123(1) of the ETA defines a taxable supply as a supply made in the course of a commercial activity. It includes the sale of real property by a person unless the property is considered an exempt supply. An exempt supply, as per the same subsection, is a supply listed in Schedule V of the ETA. The sale of a residential complex by a builder is not considered an exempt supply.

The position of Ms. Simonetta is that the sale of the property to her was a taxable supply, and it was a commercial activity unless it can be proven to be an exempt supply. The CRA, however, took the position that there was not enough evidence to determine whether the Vendors met the definition of a builder according to subsection 123(1) of the ETA. The CRA also argued that there was not enough evidence to establish whether the sale was exempt or taxable. The Tax Court found that it must be demonstrated that either the Vendors were builders of the house or that they claimed ITCs for their last acquisition of the property it must be demonstrated for the sale of the property to be classified as a taxable supply.

Under subsection 123(1) of the ETA provides a definition of a builder of a residential complex, which includes a person who engages in the construction of the complex when they have an interest in the real property, except for cases where the construction occurs outside the scope of a business or an adventure or concern in the nature of trade. Thus, it was essential to determine whether the construction of the house falls under an adventure or concern in the nature of trade to ascertain if the Vendors could be considered builders for tax purposes.

Adventure in the Nature of Trade

The term "adventure in the nature of trade" is used by the Tax Court to determine if certain transactions are of a business or capital nature. This concept is crucial for assessing whether gains are taxable as income or capital gains. In the context of income tax, determining if a transaction is an adventure in the nature of trade involves assessing whether a gain's nature is of income or capital. Factors considered in this determination include the nature of the property, length of ownership, frequency of similar transactions, work invested in the property, circumstances leading to the sale, and motive or intention. The court examined these factors as they related to the case finding that:

• Nature of the Property: The property in question is a custom-built executive home with luxurious features. The property could have been used as a residence or sold for profit. Thus, the nature of the property was a neutral factor in this analysis.
• Length of Ownership: The Vendors owned the property for about six years but had the substantially completed house for only about two years, which the Tax Court considered to be a relatively short period. This short ownership period aligned with an adventure in the nature of trade.
• Frequency or Number of Similar Transactions: The Vendors disposed of at least three properties over a short time, which implied a frequency consistent with an adventure in the nature of trade.
• Circumstances Responsible for the Sale: The Vendors faced numerous challenges during house construction, and financial pressures from the bank and an associate pushed them to sell the property to pay off debts. This factor pointed in both directions.
• Motive or Intention: The Supreme Court has emphasized the need for a legitimate intention to gain a profit. The Vendors' intention evolved over time, with the primary goal shifting towards selling the property for maximum profit to pay off debts. This change in intention suggested an adventure in the nature of trade.

During this examination the Tax Court also highlighted the use of borrowed money. That the Vendors used significant borrowed funds to finance their property acquisition and house construction, suggested an adventure in the nature of trade. In weighing these factors, the Tax Court found that the determination leaned towards an adventure in the nature of trade. The extensive use of borrowed funds by the Vendors was a key factor in tilting the scales of the Tax Court.

The court additionally, considered misrepresentations that had been made by the Vendors and their solicitor when faced with the Simonettas specific observations. After carefully considering the evidence and weighing the factors, the conclusion of the Tax Court was that the Vendors' intention changed in 2014. Thus, leading them to embark on an adventure in the nature of trade and were therefore considered builders of the house for tax purposes.

Implications of an Adventure in the Nature of Trade

After finding that the Vendors were builders of the house, the Tax Court further found that the property was taxable supply and that the sale of the Property to Ms. Simonetta was subject to HST. That the Vendors did not certify the sale of the Property was not subject to HST, and, due to the clause (mentioned above) that Ms. Simonetta ensured was included in the APS, the HST was included in the price that she paid for the Property.

The CRA argued, however, that there was no payment of HST by Ms. Simonetta since the sale and purchase of the property did not breakdown or show the HST as a separate amount. In response the Tax Court stated that the clear and undisputed sale price in connection to the clauses of the contract clearly states that the HST was to be included in the purchase price. By paying the price, Ms. Simonetta also paid the HST. Finally, the Tax Court discussed the sufficiency of an application form that was left incomplete by the Simonettas.

The Incomplete Form

The ETA stipulates that an application for a new housing rebate must adhere to prescribed form and information requirements, submitted in the prescribed manner. The only issue raised by the Crown pertains to Section D of the application submitted by Ms. Simonetta, which lacked information about the builder.

Section D requires various information about the builder. This includes a question regarding whether the builder paid the rebate directly to the purchaser. Even though this was not answered, from the evidence presented during the hearing the Tax Court found that the answer was "No." Section D additionally calls for the signature of the builder.

Mr. Simonetta testified that he completed the application on his wife's behalf. He believed that the Vendors would not cooperate in providing the required information in Section D or in signing the application.

The Tax Court found that there was no precedent in jurisprudence for what a new home purchaser should do when the vendor refuses to cooperate in submitting the rebate application form. The Tax Court, however, found that in cases in similar contexts of exceptional circumstances, a claim might succeed where the other party unreasonably refuses to complete and sign a required form.

In this case, Mr. Simonetta believed it would be pointless to request information from the Vendors given the history of correspondence between solicitors, where the Vendors had already declined to provide certain documentation. The Vendors' solicitor had also already failed to engage in meaningful dialogue about the HST implications of the property sale.

The Tax Court found that given the nature of the correspondence and the Vendors' solicitor's dismissive responses, to expect Ms. Simonetta to request the Vendors' cooperation in signing the application would have been unreasonable. Concluding that this case was a rare situation where a recipient of a taxable supply of a new residence could not obtain all the information required to complete the application form due to the builder's uncooperative behavior and misrepresentations.

Pro Tax Tips – Proper Legal Tax Advice When Deciding a Course of Action

Mr. B, one of the Vendors, as part of his testimony, stated that the advice on the rebate that he received was initially from his real estate agent. The Tax Court highlighted the lack of qualified tax advice that Mr. B had sought when deciding his initial course of action. This lack of due diligence affected the Tax Court's assessment of Mr. B's testimony. If Mr. B received proper legal tax advice from a top Canadian tax lawyer not only would the Tax Court's judgement of his testimony would have improved, but the dispute itself would have likely gone a significantly different course and possibly avoided escalation to the courts.

FAQs:

How do I determine if a property sale is considered a taxable supply under the Excise Tax Act?

To determine if a property sale is considered a taxable supply under the Excise Tax Act, you need to assess various factors, including whether the seller qualifies as a builder of the property, whether the property qualifies as a residential complex, and whether any exemptions apply. Several factors can influence whether a property sale is subject to Harmonized Sales Tax (HST) and eligible for the New Housing Rebate. These factors may include the nature of the property, the length of ownership, the frequency of similar transactions, the work invested in the property, the circumstances leading to the sale, and the motive or intention of the seller. It's important to consult with an experienced Canadian tax lawyer to understand the specific circumstances of your property sale and its tax implications.

What should I do if the builder or vendor refuses to cooperate in completing the rebate application form?

If you find yourself in a situation where the builder or vendor refuses to cooperate in completing the rebate application form, it's crucial to consider the circumstances carefully. This case has set the precedence that, in exceptional circumstances, a claim might still succeed when the other party unreasonably refuses to complete and sign the required form. Consult with an expert Canadian tax lawyer to explore your options and ensure you meet all necessary requirements for the rebate application.

What should I do if I suspect that the property I'm purchasing has not been lived in, and the seller disagrees regarding the eligibility for the New Housing Rebate?

If there is a disagreement between you and the seller regarding the eligibility of the property for the New Housing Rebate, it's essential to document your observations and gather evidence to support your claim. Consult with an expert Canadian tax lawyer to understand your rights and responsibilities in such a situation and to ensure that you follow the correct procedures when applying for the rebate.