March 2014
Tax Bulletin
To Tax or Not to Tax, the Supply is the
Question: Case Comment – Casa
Blanca Homes Ltd. v. R
The Decision
In Casa Blanca Homes Ltd. v. R., 1 Canada Revenue Agency
(“CRA”) assessed a GST registrant, Casa Blanca Homes Ltd.
(“Casa Blanca”), for not charging, collecting, reporting and
accounting for GST on certain deposits (the “Deposits”)
transferred by Casa Blanca to other parties (the “Assignees”).
The Assignees acquired the Deposits as a result of the
assignment by Casa Blanca to the Assignees of Casa Blanca’s
interests in the purchase of real property (vacant lots).
The Tax Court of Canada found that the Deposits transferred to
the Assignees were not part of the consideration for the taxable
supplies of the real property from Casa Blanca to the Assignees.
As the result of each assignment by Casa Blanca to an Assignee,
there were two supplies:
1. a taxable supply of real property from Casa Blanca to the
Assignee (i.e., the taxable supply of a right to purchase real
property, a vacant lot); and
2. an exempt supply of a financial service of transferring a
beneficial interest in the Deposit (a “debt security” and,
therefore, a “financial instrument”).
1
[2013] GSTC 128 (TCC, Informal Procedure).
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As consideration for the taxable supply, the assignment fee (the
“Assignment Fee”) paid by Casa Blanca to the Assignee
attracts GST. Casa Blanca had appropriately charged, collected,
reported and accounted for GST on the Assignment Fees.
However, the transfers of the beneficial interests in the Deposits
to the Assignees were exempt from GST. Accordingly, the Tax
Court allowed the appeal and overturned the GST assessment
issued against Casa Blanca by CRA.
The Facts
Casa Blanca entered into numerous purchase agreements
(“Agreements”) with a property developer (the “Developer”).
Under each of these Agreements, on paying a non-refundable
Deposit to the Developer, Casa Blanca acquired the right, and
assumed the obligation, to purchase a vacant lot in future. Each
Deposit constituted security with respect to Casa Blanca’s
obligation to complete the purchase of the lot, failing which it
would be forfeited to the Developer as liquidated damages. Upon
completion of the transaction, the Deposit would be applied
against the purchase price of the lot.
Casa Blanca subsequently assigned most of these Agreements to
the Assignees. To acquire the right to purchase the vacant lots
under the Agreements, the Assignees paid:
i.
the Assignment Fee; and
ii.
a sum equal to the Deposit that Casa Blanca had paid to the
Developer (the “Deposit Recovery”).
Casa Blanca charged and collected GST on the Assignment Fee,
but not on the Deposit Recovery.
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Issue
At issue before the Tax Court was whether the Deposit
Recoveries were subject to GST.
Casa Blanca’s Position
Casa Blanca submitted that the Deposit Recovery should not be
subject to GST because it was not consideration for acquiring an
interest in the real property (i.e., the vacant lot). Rather, the
Deposit Recovery was paid to acquire Casa Blanca’s beneficial
interest in the Deposit held by the Developer.
As a “debt security”, the Deposit is a “financial instrument” under
Part IX of the Excise Tax Act (the “ETA”). 2 The transfer of
ownership of the financial instrument (i.e., the beneficial interest
in the Deposit held by the Developer) from Casa Blanca to the
Assignee was an exempt supply of a financial service. 3
From a policy perspective, Casa Blanca argued that taxing the
Deposit Recovery would result in double-taxation imposed
against the Assignee (once on the Deposit Recovery and again on
applying the Deposit against the purchase price). The first
incidence would occur when the Assignee paid the Deposit
Recovery to Casa Blanca. The second incidence would occur when
the Developer applied the Deposit toward the payment of the
purchase price for the vacant lot on behalf of the Assignee. As
the Assignees were not registered for the GST and could not
claim input tax credits (“ITCs”) to recover the GST, the
Assignees would bear the costs of GST imposed on the amount of
the Deposits twice.
2
Excise Tax Act, (RSC 1985, c. E-15), subsection 123(1).
3
Section 1, Part VII, Schedule V to the ETA.
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CRA’s Position
In contrast to Casa Blanca’s approach that Casa Blanca made two
separate supplies to the Assignee, (i) an exempt supply of a
financial service, and (ii) a taxable supply of an interest in real
property, CRA argued that the Deposit Recovery and Assignment
Fee together constituted the consideration for the taxable supply
of the interest in the real property (i.e, the vacant lot). CRA
submitted that this approach did not constitute double-taxation
because each incidence of tax occurred on a separate
transaction, not a single transaction, the first one between Casa
Blanca and the Assignee, and the second one between the
Developer and the Assignee. Accordingly, Casa Blanca should
have charged, collected and accounted for GST on the entire
consideration received for the taxable supply of real property
made to the Assignee (both the Assignment Fee and the Deposit
Recovery).
Analysis and Conclusions of the Tax Court
In resolving the issue of whether Casa Blanca made:
i.
an exempt supply of a financial service and a taxable supply of
an interest in real property to the Assignee, as contended by
Casa Blanca, or
ii.
a single taxable supply of an interest in real property to the
Assignee, as advocated by the CRA,
the Tax Court applied the principles for determining whether
there is a single supply or there are multiple supplies, as
established by the leading case of O.A. Brown Ltd. v Canada 4
(“OA Brown”) and approved by the Supreme Court of Canada
in Calgary (City) v Canada. 5
4
O.A. Brown Ltd. v Canada, [1995] GSTC 40 (TCC).
5
Calgary (City) v Canada, [2012] 1 SCR 689.
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As it was possible to structure the transactions such that the
Assignee would pay a new Deposit to the Developer to replace
the original Deposit released by the Developer to Casa Blanca
(but was not structured this way for administrative simplicity),
the Deposit Recovery and Assignment Fee were not so
inextricably linked so as to be considered related to a single
taxable supply of the vacant lot. Rather, each transaction had a
sufficiently distinct purpose to be considered separate supplies.
In addition to applying the principles from OA Brown, the Tax
Court found this interpretation persuasive because it “avoids
double taxation, which … was not intended by Parliament.” 6
In the alternative, the Tax Court held that the assignment of a
Deposit was not really a supply at all, but rather the transfer of
an interest in money. A “supply” is defined as the provision of
“property” or a “service”, which, by definition, exclude “money”. 7
Practical Implications
This decision is a sensible one. The Deposit Recoveries were
intended to compensate Casa Blanca for the Deposits that Casa
Blanca had paid to the Developer and then beneficially assigned
to the Assignees. As far as Casa Blanca was concerned, cash (the
Deposits) was being replaced by other cash (the Deposit
Recoveries). As strictly monetary or financial transactions, the
Deposit Recoveries paid by the Assignees to Casa Blanca to
reimburse the Deposits should not attract GST.
From a policy perspective, no double-taxation would arise on the
Deposit amounts. The only incidence of tax would occur when the
Deposits were applied against the taxable purchase price of the
vacant lots. Double tax would be particularly egregious in these
circumstances where the Assignees could not claim ITCs to
recover the GST payable, resulting in duplicate tax costs borne
6
Supra, footnote 1, paragraph 25.
7
Supra, footnote 2.
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by the Assignees. Such a double-up of the tax costs would be
particularly burdensome under a HST regime.
By contrast, an Assignment Fee is a premium paid by an
Assignee to Casa Blanca (i.e., the assignor) to acquire the right
to purchase the vacant lot from the Developer. As such, the
Assignment Fee is consideration for a taxable supply and subject
to GST. Not only should this case settle what amount of tax an
assignor should charge and collect, but in appropriate
circumstances, how to calculate the tax to be self-assessed,
reported and paid (subject to any ITC and rebate claims to offset
the tax paid) by an assignee registered for the GST/HST. 8
Although CRA did not appeal this Informal Procedure decision,
CRA advises that it does not agree with, and will not apply, the
principles enunciated in this decision. CRA stands by its policy
established before this decision. In its view, there is only one
supply, a taxable sale of an interest in real property, for which
the assignee pays to the assignor consideration of the aggregate
amount of the deposit, plus the assignment fee.
What CRA’s intransigence means is that if an assignor and
assignee follow the Casa Blanca Homes decision, then either the
assignor or assignee could be assessed for GST/HST imposed on
the deposit and may need to be prepared to go to Tax Court to
dispute the assessment (to re-litigate the same issue in dispute
and resolved in Casa Blanca Homes). Alternatively, to avoid
GST/HST imposed on the deposit, the parties could structure the
nature of the legal transactions (with appropriate legal
documentation) so that the assignee would pay a new deposit to
the vendor to replace the assignor’s deposit released to the
assignor. Stayed tuned, as abiding by the Casa Blanca Homes
decision may be insufficient to satisfy the CRA.
8
ETA, subsections 221(2) and 228(4) and (6).
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It should be noted that the obligations to charge, collect, report
and account for GST/HST are not restricted to a GST/HST
registrant supplier. A private transaction between a nonregistrant assignor and a non-registrant assignee could be
subject to GST/HST. 9 Where non-registrant assignor is maing a
taxable supply of selling an interest in real property to an
assignee unregistered for the GST/HST, the assignor would
generally be required to report and remit the GST/HST charged
and collected with a non-registrant GST/HST return due by the
end of the month immediately following the month of the
completion of the transaction and payment of the GST/HST on
the assignment fee. 10
by Jamie M. Wilks, Roberto Andreacchi and Liezl Behm, Student-at-Law
9
A “taxable supply” is a supply made by a person in the course of a “commercial activity” pursuant to
subsection 123(1) of the ETA. A supply of real property by way of sale is considered to be made in the
course of a “commercial activity” and, therefore, a taxable supply, unless there is a specific exemption
in Schedule V of the ETA that applies.
10
ETA, section 221, subsections 238(2) and 245(1). Even if the assignee is registered for the
GST/HST, the supplier may be required to charge and collect the GST/HST on the assignment fee
because the assignee is an individual acquiring an interest in a “residential complex”. Note that a nonresident supplier would generally be relieved from charging and collecting GST/HST pursuant
paragraph 221(2)(a) of the ETA, placing the onus on the purchaser (regardless of the purchaser’s
GST/HST registration status) to self-assess, report and pay the GST/HST directly to CRA.
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For more information on this topic, please contact:
Toronto
Jamie M. Wilks
416.865.7804
jamie.wilks@mcmillan.ca
Toronto
Roberto Andreacchi
416.865.7856
roberto.andreacchi@mcmillan.ca
a cautionary note
The foregoing provides only an overview and does not constitute legal advice. Readers are
cautioned against making any decisions based on this material alone. Rather, specific legal
advice should be obtained.
© McMillan LLP 2014
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