In a recent Tax Court of Canada case, a taxpayer successfully challenged an almost $900,000 tax reassessment because the government made the reassessment outside of the four year time limit.

What Happened?

The taxpayer was a company engaged in the business of real estate rentals and development. In 2007, it acquired a hotel in Vancouver. 

The taxpayer immediately leased the property to the former owner until April 30, 2010 and the former owner continued to operate the property as a hotel. 

The lease between the taxpayer and the former owner stated that the permissible uses of the property were as “a hotel, restaurant, paid parking and business ancillary to the hotel.” 

On October 20, 2009, the taxpayer entered into a lease of the property with a community service society (the “society”) to run from May 1, 2010 to March 31, 2013. The society was a non-profit organization that operated housing projects and support programs targeting the homeless. The society wanted to lease the property in order to provide housing for the homeless by offering transitory accommodation until permanent housing could be found. The taxpayer agreed to lease the property to the society because it felt it was the right thing to do. 

The lease with the society provided that the permitted use of the property was as a “funded and managed housing program”. The lease also provided that the society would “conduct its business and activities on the Premises in accordance with the operational plan for the Premises approved by the City.” The operational plan stated that the property would be run as a “supportive long-term housing project for 100 homeless adults living with mental illness”. 

On June 10, 2016 the Minister of National Revenue (the “Minister”) reassessed the taxpayer on the basis that when the lease with the former owner ended and the lease with the society began, the taxpayer had begun to hold the property as a residential complex. As a result of the conversion of the property to residential use, the Minister held that there was a deemed self-supply of the property and a requirement to remit GST on the fair market value of the property at the time of the change in use. 

The Minister reassessed the taxpayer for GST in the amount of $892,350. 

The taxpayer appealed the reassessment.

Issues

Both the Minister and the taxpayer agreed that the reassessment was made beyond the four year time limit set out in subsection 298(1) of the Excise Tax Act (the “Act”).

As a result, the Minister had to show that the taxpayer made a misrepresentation attributable to neglect, carelessness or willful default in its return for the reporting period at issue to be exempt from the time limitation.

The Minister alleged that the taxpayer’s failure to report the deemed sale of the property in its return for the period ending July 31, 2010 was a misrepresentation that occurred as a result of the taxpayer’s failure to take reasonable care. The Minister stated that the taxpayer should have specifically pointed out to its accountant (who prepared the tax return) that the society was going to put the property to a different use than the former owner and should have asked the accountant about possible GST consequences arising from the different use. The Minister argued that the taxpayer’s failure to do so was conduct that fell short of the conduct of a wise and prudent person in similar circumstances. The Minister argued that even where a taxpayer relies on an accountant or other professional adviser, his or her own prudence or diligence must be established.

Finally, the Minister asserted that if the court allowed the appeal, it would be encouraging “taxpayers to hire a professional and then keep silent in the hope that something will slip by their advisor’s attention.”

Tax Court of Canada Decision

The first question to be determined was whether the taxpayer made a misrepresentation in its return for the period ending July 31, 2010. The misrepresentation alleged by the Minister was that the taxpayer failed to report the GST it was deemed to have collected on a change of use of the property from use in commercial activity to use in the making of an exempt supply under the society’s lease. 

In the absence of proper evidence, the court did not find that the Minister had shown that the supplies or intended supplies of the property by the society were exempt or that the taxpayer made a supply of the property by way of sale during its reporting period ending July 31, 2010 and collected GST on the deemed sale.

As a result, the court found that the Minister had not shown that the taxpayer made a misrepresentation on the return filed for that reporting period.

Additionally, the court stated that even if it had concluded that the taxpayer had been required to report a deemed sale or self‑supply of the property and therefore had made a misrepresentation in its return for the relevant reporting period, the court would still have found that the evidence did not support the conclusion that the taxpayer was negligent or careless in making the misrepresentation.

In the court’s view, the taxpayer was not careless or negligent in not bringing to the attention of its accountant the fact that the society would be using the property for a different purpose than the former owner had. It found that the Minister had not shown that the change in permitted use of the property would have led a reasonable person to make enquiries about a self-supply or change of use issue. 

As a result, the appeal was allowed, with costs to the taxpayer. 

Get Advice 

Mark Feigenbaum brings together many years of litigation experience with a deep knowledge of tax law, corporate law, accounting, finance, and other related practice areas. Mark can help you avoid the biggest risks that may arise in tax disputes.

Prior to founding his law firm, Mark worked in the cross-border tax department of an international Big 4 firm, and held accounting management positions across a variety of sectors in both Canada and the United States.

With tax legislation in constant flux on both sides of the border, Mark takes great care to stay current on all relevant developments in law and policy. He carefully considers all solutions available to craft a response that proactively considers the policies and best practices of a given tax authority.

If you are involved in a tax dispute or related litigation, contact Mark Feigenbaum for exceptional representation and guidance. Mark’s many years of interdisciplinary knowledge in law, tax, accounting, and finance and significant cross-border experience make him uniquely positioned to assist you. Mark offers services to clients in the U.S., Canada and around the world. Contact Mark online or call him at (905) 695-1269 or toll-free at (877) 275-4792 to book a consultation.