27 Cardigan Inc. v. Canada

27 Cardigan Inc. v. Canada Court (s) Database Federal Court of Appeal Decisions Date 2005-03-18 Neutral citation 2005 FCA 100 File numbers A-344-04, A-345-04 Decision Content Date: 20050318 Dockets: A-344-04 A-345-04 Citation: 2005 FCA 100 CORAM: NOËL J.A. SEXTON J.A. EVANS J.A. A-344-04 BETWEEN: 27 CARDIGAN INC. Appellant and HER MAJESTY THE QUEEN Respondent A-345-04 AND BETWEEN: 33 CARDIGAN INC. Appellant and HER MAJESTY THE QUEEN Respondent Heard at Toronto on March 8, 2005. Judgment delivered at Ottawa, Ontario, on March 18, 2005. REASONS FOR JUDGMENT BY: SEXTON J.A. CONCURRED IN BY: NOËL J.A. EVANS J.A. Date: 20050318 Dockets: A-344-04 A-345-04 Citation: 2005 FCA 100 CORAM: NOËL J.A. SEXTON J.A. EVANS J.A. A-344-04 BETWEEN: 27 CARDIGAN INC. Appellant and HER MAJESTY THE QUEEN Respondent A-345-04 AND BETWEEN: 33 CARDIGAN INC. Appellant and HER MAJESTY THE QUEEN Respondent REASONS FOR JUDGMENT SEXTON J.A. [1] These are appeals from a decision of the Tax Court of Canada in which Bowie J. allowed in part the appellants' appeal from reassessments of goods and services tax (GST) made in respect of the period from October 1, 1994 to September 30, 1997 by the Minister of National Revenue (Minister) under the Excise Tax Act, R.S.C., 1985, c. E-15, as amended (Act). [2] By his decision, Bowie J. held that the appellants exercised due diligence in reporting and remitting GST and therefore were not liable for any penalty under section 280 of the Act. However, he confirmed the Minister's determination of the fair market value (FMV) of each of the designated individually-titled units (Units) in a 187-unit condominium project located at 675 Richmond Street, London, Ontario (Property) for the purpose of assessing GST against the two appellants. Background [3] When construction of the Property was approximately 60% completed, 27 Cardigan Inc. purchased 94 of the Units and 33 Cardigan Inc. purchased the remaining 93 Units from a related corporation for a total consideration of $10,544,000. [4] The Property consisted of the Units, with parking, and some commercial space. The individual Units did not become occupied simultaneously but rather were first leased over the period between October 1, 1994 and September 30, 1997. All of the Units were eventually leased to tenants but they were not registered as condominium units until June 23, 1998. [5] In accordance with subsection 191(1) of the Act, on the date of first occupation of a Unit by a tenant, (the Effective Date) there is a deemed self-supply of that Unit to the builder giving rise to the imposition of GST at the rate of 7% of the Unit's FMV. Subsection 191(1) requires the builder to calculate and remit the GST in respect of the Units. [6] The appellants calculated and remitted the GST based on a draft appraisal report from their real estate appraiser, Lansink Best & McIver, dated June 30, 1995, which estimated the aggregate value of the Units as of August 1, 1995 to be $12,000,000. [7] On September 14, 1998, Ben Lansink of Lansink Best & McIver issued an appraisal with an aggregate FMV of $9,850,000. In making the reassessments in issue, the Minister assumed an aggregate FMV for the units of $16,963,000 on the basis of an appraisal report prepared on August 27, 1999 by Warren Shannon of the London Tax Services of the Department of National Revenue. [8] After the appeal had been brought to the Tax Court, the appellants obtained a further opinion from Lansink, who calculated at $75.00 per square foot the average price obtained by vendors who sold condominium units in other buildings that were comparable to the Property between October 1994 and February 1995. Lansink's evidence was that the condition of the real estate market in the London area was "in the dumps" and "difficult" and that market demand for condominium units of a type similar to the Units was "soft" in the period between October 1, 1994 and September 30, 1997. [9] Then Lansink set about to determine the FMV of the units for the purposes of subsection 191(1) of the Act. To do so, he estimated the price which could have been obtained for the Units if they had each been capable of being sold as of the Effective Date. He concluded that none of the Units would have been capable of being sold on its own as of the Effective Date without all of the Units having first been registered as a condominium, which meant they would all have been available for sale at the same time. Based on this assumption, he calculated the FMV of each of the Units by applying a market absorption discount to the figure of $75.00 per square foot in order to account for the presence of the other 186 Units on the market at the same time. [10] After analysing sales of comparable condominium units during the period from October 1994 to March 1995, Lansink determined that if the Units were marketed in a competent, professional and very aggressive manner, it would have taken 6 years for the market to absorb all of them, at a rate of approximately 30 Units per year. He then applied a present- value calculation to the amount of net revenue which the appellants would have realized from the sale of the Units over the market absorption period to determine the FMV of each Unit as of the Effective Date. This had the effect of reducing the FMV of the Units by approximately 45% from the $75.00 figure he had earlier calculated. Decision Under Review [11] Bowie J. accepted that, if only one was on the market, the value of a condominium apartment in the 675 Richmond Street building, during the period from November 1994 to September 1997 was $75.00 per square foot, as Mr. Lansink's evidence suggests. [12] However, he went on to hold that, as a legal matter, there was no basis for the application of the discount applied by Mr. Lansink in determining the fair market value of the respective units. He said (paragraph 13): First, there is the question whether any discount should be applied at all. Mr. Lansink's theory is that for the purpose of each of his 187 appraisals, he must assume not only a hypothetical sale by a willing vendor to a willing purchaser of the particular unit being appraised, but also that this hypothetical sale takes place not in the London market as it existed on the date at which each unit is being appraised, but as it would have existed if all 186 other units had been placed on the market that day. The Excise Tax Act imposes a tax on hypothetical transactions that the statute deems to have taken place, although they did not in fact take place at all. Each deemed supply and receipt of a unit is a separate one, and the determination of the fair market value of the unit on which it operates is unaffected by any other hypothetical transactions that may be deemed to take place at or about the same time. That is because those deemed sales and receipts of supplies never take place, and indeed the units are not offered for sale, and so they are not capable of affecting the market that exists in reality. It is in the context of that real market that value must be determined. [13] He went on to say (paragraph 14): [...] The deeming provision in subsection 191(2) of the Act operates independently in respect of each unit that is deemed to be supplied and deemed to be acquired by the builder. It does not deem every other unit in the building to be for sale on the market at the same time. [14] The Trial Court Judge went on to hold, in the alternative, that if a volume discount was properly applicable, then the discount proposed by Mr. Lansink was excessive. He said as follows: It is noteworthy, too, that Mr. Lansink, although he discounted value by 45% on the basis of his notion that he had to take into account a hypothetical glut on the market, did not produce in his evidence any analysis of the dates of first occupation of the units. Had he done so he would have seen that July, August, September and October 1995 were the only months in which more than 10 of the units became occupied for the first time. If a glutting of the market were a relevant concern for him to take into account, which I do not accept, then the hypothetical glut was not nearly of the magnitude that he apparently thought. Rather than the 187 units being hypothetically exposed for sale in one day, as he seemed to suppose, they would have come onto the market quite gradually between November 1994 and June 1995, and again from November 1995 to September 1996. [...] Indeed, it is only during the second half of 1995 that more than 30 units per year were occupied for the first time. Even on his evidence, the market could absorb all the units that hypothetically were sold during all of 1994, the first six months of 1995, all of 1996 and all of 1997. Mr. Lansink failed to consider the possibility that a modest discount from the $75.00 per square foot value otherwise ascertained would entice sufficient buyers to the market. There is no reason to believe that residential real estate is not a highly elastic commodity. [15] He concluded this aspect of his decision as follows (paragraph 28): [...] If I were persuaded that this [i.e., volume] is a proper factor to take into account, then the allowance that I would make would be to discount the values of those 96 apartments first occupied in the months of July, August, September and October, 1995 by 10%. I consider this to be sufficient to ensure that all the apartments would be absorbed by the market as they became available. The effect of such a discount would be to decrease the aggregate value of the units by $895,860, divided more or less evenly between the two Appellants. Grounds of Appeal [16] The appellants allege that the Tax Court Judge erred in law in holding that, as a legal matter, a volume or market absorption discount could not be applied to a deemed supply and receipt pursuant to subsection 191(1) of the Act. While the Tax Court Judge was correct to hold that "each deemed supply and receipt is a separate one", it does not follow that the presence of other Units on the market at the relevant time should be disregarded in determining the fair market value of any one of them (Malette v. Canada, 2004 FCA 187). [17] The appellants further submit that, if a market absorption discount should be applied as a legal matter, there was no basis upon which the Tax Court Judge could reduce from 45% to 10% the discount proposed by Lansink. As such, the appellants contend that the Tax Court Judge committed a palpable and overriding error. Analysis and Decision [18] It has been held that the determination of FMV is one of fact and therefore, the standard of review is palpable and overriding error (Housen v. Nikolaisen, [2002] 2 S.C.R. 235). In CIT Financial Ltd. v. Canada, 2004 FCA 201, this Court found (paragraph 13), The jurisprudence is clear that the determination of fair market value is a question of fact rather than a question of law. See for example Gold Court Selection Trust Limited v. Humphrey (Inspector of Taxes), [1948] A.C. 459 at 473. As a result, according to Housen v. Nikolaisen, [2002] 2 S.C.R. 235, the standard of review with respect to findings of fact is palpable or overriding error. [19] In the course of his analysis, the Tax Court Judge did not refer to the decision of this Court in Malette, supra, where it was held that, in assessing the fair market value of 981 works of art by the same artist, which had been donated to a public gallery, a volume, or market absorption discount, had to be taken into account. [20] The argument against the application of such a discount in that case was similar to the one adopted by the Tax Court Judge, i.e.: each work of art had to be valued individually, thereby precluding consideration of the other works of art coming onto the hypothetical market at the same time. [21] Speaking for the Court, Noël J.A. rejected this argument, saying that volume or market absorption discounts were an accepted principle of valuation methodology. The Court held that the need to value a particular object individually did not preclude the application of such a discount. The reality was that 981 works of arts were deemed to be disposed of at once, and recognition had to be given to the depressive effect which this would have on the value of each item. [22] Similarly, the reality in this case is that, according to the reassessments in issue, not one, but 187 Units were deemed to be disposed of over a period of approximately 2 ½ years. To the extent that this supply would have had a depressive effect on the price of each Unit, this must be reflected in its respective FMV. [23] I am therefore of the view that the Tax Court Judge erred when he held that, as a legal matter, a volume or market absorption discount could not be applied in determining the FMV of a deemed supply pursuant to subsection 191(1) of the Act. [24] The question then is whether Bowie J. erred in his determination of the discount applicable. [25] The appellants argue that the discount of 45% should apply as a result of the Lansink analysis. However, that analysis was rejected by Bowie J. because: a. the market evidence demonstrated that more than 30 Units could be sold each year; b. the market evidence demonstrated that sales were limited by lack of units, not lack of buyers; c. the market evidence demonstrated that very aggressive marketing was not required to sell the Units; d. there was no factual support for a six year sales estimate and Lansink's resale evidence answers given in cross-examination were found to be an afterthought; e. the present value of the likely net proceeds of sale of all the Units at unspecified dates in the future ("Lansink's present value calculation") was unsupported and misguided as it ignored the FMV of the Unit at the date of first occupancy; f. Lansink's present value calculation was speculative and not objective as it took into account costs that are not recognized as valid adjustments to an appraisal (e.g. real estate commissions) and ignored adjustments like rents, other revenues and increments in re-sale prices over the hypothetical 6-year marketing period; and g. the evidence failed to account for the date of first occupancy of the Units, which if considered would have over time reduced the hypothetical glut and established that the market could have absorbed all the Units hypothetically sold during 1994, the first 6 months of 1995, and all of 1996 and all of 1997. [26] These are factual findings and I am unable to see that there is any palpable and overriding error. [27] However, more importantly, Lansink's opinion was apparently based upon his conclusion that all the Units would hypothetically be placed on the market at the same time. It was the appellants' position that, because the definition of "residential condominium unit" in subsection 123(1) of the Act defines a residential complex as not only being in existence, but also as "intended to be" in existence, the Court should conclude that all of the 187 Units would hypothetically be on the market at the same time. [28] This argument, however, ignores the fact that subsection 191(1) of the Act presupposes a hypothetical sale of each Unit at FMV at the time each Unit is first rented. Because the Units were rented at different times, and because that time of first occupancy is the date at which the Unit is hypothetically disposed of, it cannot be concluded that all 187 Units would hypothetically be offered for sale at the same time: 191. (1) For the purposes of this Part, where (a) the construction or substantial renovation of a residential complex that is a single unit residential complex or a residential condominium unit is substantially completed, (b) the builder of the complex (i) gives possession of the complex to a particular person under a lease, licence or similar arrangement (other than an arrangement, under or arising as a consequence of an agreement of purchase and sale of the complex, for the possession or occupancy of the complex until ownership of the complex is transferred to the purchaser under the agreement) entered into for the purpose of its occupancy by an individual as a place of residence, (ii) gives possession of the complex to a particular person under an agreement for (A) the supply by way of sale of the building or part thereof in which the residential unit forming part of the complex is located, and (B) the supply by way of lease of the land forming part of the complex or the supply of such a lease by way of assignment, other than an agreement for the supply of a mobile home and a site for the home in a residential trailer park, or (iii) where the builder is an individual, occupies the complex as a place of residence, and (c) the builder, the particular person or an individual who is a tenant or licensee of the particular person is the first individual to occupy the complex as a place of residence after substantial completion of the construction or renovation, the builder shall be deemed (d) to have made and received, at the later of the time the construction or substantial renovation is substantially completed and the time possession of the complex is so given to the particular person or the complex is so occupied by the builder, a taxable supply by way of sale of the complex, and (e) to have paid as a recipient and to have collected as a supplier, at the later of those times, tax in respect of the supply calculated on the fair market value of the complex at the later of those times. 191. (1) Pour l'application de la présente partie, lorsque les conditions suivantes sont réunies_: a) la construction ou les rénovations majeures d'un immeuble d'habitation - immeuble d'habitation à logement unique ou logement en copropriété - sont achevées en grande partie, b) le constructeur de l'immeuble_: (i) soit en transfère la possession à une personne aux termes d'un bail, d'une licence ou d'un accord semblable (sauf un accord qui est connexe à un contrat de vente visant l'immeuble et qui porte sur la possession ou l'occupation de l'immeuble jusqu'au transfert de sa propriété à l'acheteur aux termes du contrat) conclu en vue de l'occupation de l'immeuble à titre résidentiel, (ii) soit en transfère la possession à une personne aux termes d'une convention, sauf une convention portant sur la fourniture d'une maison mobile et d'un emplacement pour celle-ci dans un parc à roulottes résidentiel, portant sur l'une des fournitures suivantes_: (A) la fourniture par vente de tout ou partie du bâtiment dans lequel est située l'habitation faisant partie de l'immeuble, (B) la fourniture par bail du fonds faisant partie de l'immeuble ou la fourniture d'un tel bail par cession, (iii) soit, s'il est un particulier, occupe lui-même l'immeuble à titre résidentiel, c) le constructeur, la personne ou le particulier locataire de celle-ci ou titulaire d'un permis de celle-ci est le premier à occuper l'immeuble à titre résidentiel après que les travaux sont achevés en grande partie, le constructeur est réputé_: d) avoir effectué et reçu, par vente, la fourniture taxable de l'immeuble au dernier en date du jour où les travaux sont achevés en grande partie et du jour où la possession de l'immeuble est transférée à la personne ou l'immeuble est occupé par lui; e) avoir payé à titre d'acquéreur et perçu à titre de fournisseur, au dernier en date de ces jours, la taxe relative à la fourniture, calculée sur la juste valeur marchande de l'immeuble ce jour-là. [29] I therefore, conclude that Bowie J. did not commit a palpable and overriding error in concluding that the 45% discount rate could not be justified. [30] As has been mentioned, Bowie J. concluded that if it was proper to apply a discount factor, it should be 10%. In so doing he relied upon certain of the evidence of Lansink which he was entitled to do. There is ample authority for the proposition that a trial judge is entitled to arrive at his own opinion as to FMV. See CIT Financial, supra, Hallatt v. Canada, 2004 FCA 104. [31] Bowie J. rejected Lansink's evidence that 6 years would be required for the market to absorb the 187 units because he was of the view that Lansink neither had the experience nor had done the studies necessary to support this view. He found Lansink's evidence on this point to be "at best speculative, and not at all objective". [32] The reduction of the period of sales from 6 years to 2 ½ years must have the effect of reducing the discount very considerably because the carrying costs and loss of the use of money were major components in Lansink's calculation of the discount. [33] By reason of the operation of subsection 191(1) of the Act, and the Minister's assessment, there is not just one hypothetical sale, but rather 187 hypothetical sales, which sales would take place over a 2 ½ year period because that is the time it took for them all to become rented. In my opinion, it was open to Bowie J. on the evidence to conclude that in those circumstance the market might not be able to absorb all the condominiums available for sale during that period of time. He concluded that the only time that there would be a problem of the market hypothetically absorbing all the units for sale was during the months of July, August, September and October of 1995. For those reasons, he concluded that the FMV of the 96 Units to be valued during that time should be discounted by a factor of 10%. This was a conclusion arrived at by his examination of the evidence before him, and I am unable to conclude that there was a palpable and overriding error. [34] Although it is true that on the date when the first Unit became occupied, there would be a hypothetical sale, and at that moment, none of the other 187 Units would be hypothetically for sale, and therefore, theoretically, no discount should be applied, this ignores the fact that 186 more units were about to come onto the theoretical market. It further ignores the fact that by the time the 96th Unit was theoretically disposed of, the discount factor would logically exceed 10%. Thus, over the period there would be an average discount which Bowie J. identified as being 10%. Bowie J., faced with rather unsatisfactory evidence on this question was obliged to make his own conclusion. Again, I say, I am unable to say it was a palpable and overriding error. [35] I would therefore allow the appeal and refer this matter back to the Minister for reassessment on the basis that the fair market value of each unit is to established on the basis of $75.00 per square foot of floor space subject to a 10% discount being applied to the 96 units first occupied in the months of July, August, September and October 1995, as per Appendix "B" to the reasons of the Tax Court Judge. Given that this results in the reassessments being maintained for the most part, I would award the respondent one set of costs in file A-344-04. "J. EDGDAR SEXTON" J.A. "I agree Marc Noël J.A." "I agree John M. Evans J.A." FEDERAL COURT OF APPEAL NAMES OF COUNSEL AND SOLICITORS OF RECORD DOCKETS: A-344-04 & A-345-04 APPEAL FROM A JUDGMENT OF THE HONOURABLE MR. JUSTICE BOWIE DATED JUNE 18, 2004 NO. 2000-3460(GST)G APPEAL FROM A JUDGMENT OF THE HONOURABLE MR. JUSTICE BOWIE DATED JUNE 18, 2004 NO. 2000-3463(GST)G STYLE OF CAUSE: BETWEEN: 27 CARDIGAN INC. Appellant and HER MAJESTY THE QUEEN Respondent AND BETWEEN: 33 CARDIGAN INC. Appellant and HER MAJESTY THE QUEEN Respondent PLACE OF HEARING: TORONTO, ONTARIO DATE OF HEARING: MARCH 8, 2005 REASONS FOR JUDGMENT BY: SEXTON J.A. CONCURRED IN BY: NOËL J.A. EVANS J.A. DATED: MARCH 18, 2005 APPEARANCES: David C. Nathanson, Q.C. Adrienne K. Woodyard FOR THE APPELLANT Peter M. Kremer, Q.C. Rosemary Fincham FOR THE RESPONDENT SOLICITORS OF RECORD: McDonald & Hayden LLP Toronto, Ontario FOR THE APPELLANT John H. Sims Q.C. Deputy Attorney General of Canada FOR THE RESPONDENT