Canada: Casa Blanca Homes Ltd. v. The Queen: The Transfer Of A Promise To Purchase Land, And The Related Non-Refundable Deposit, Constitute Two Distinct Supplies For GST/HST Purposes

In a decision rendered on October 25, 2013¹, the Tax Court of Canada (the "Court"), in the person of Justice Robert J. Hogan, clarified whether a supplier of a promise to purchase land, as well as the related deposit, made a single or multiple supplies within the meaning of the Excise Tax Act (the "ETA") for GST/HST purposes.

Facts

The appellant, Casa Blanca Homes Ltd. ("Casa Blanca"), entered into promises to purchase vacant lots of land from a developer. It paid a non-refundable deposit to the developer, which deposit would be forfeited and treated as liquidated damages if it failed to execute the purchase.

Casa Blanca later sold its rights under certain of these promises to purchase to third parties (the "Assignees") by way of assignment agreements. Under these agreements, the Assignees paid Casa Blanca two distinct amounts: a fee for the assignment (the "Assignment Fee"), and an amount equal to the non-refundable deposit Casa Blanca had paid to the developer (the "Deposit Recovery").

Casa Blanca collected GST from the Assignees on the Assignment Fee only. The Canada Revenue Agency ("CRA") then reassessed Casa Blanca on the basis that it should have collected GST on the amount of the Deposit Recovery as well. CRA took the position that Casa Blanca had made a single supply of an interest in real property, the consideration for which included both the Assignment Fee and the Deposit Recovery.

Decision

Justice Hogan held that Casa Blanca had made two distinct supplies. The first supply was the supply of the rights under the promise to purchase, the consideration for which was the Assignment Fee and which was taxable as the supply of an interest in real property. The second supply was the supply of the rights in respect of the deposit, which was not taxable considering the deposit was a "financial instrument" under the ETA.

Analysis

Single v. Multiple Supply

In finding that there had been two supplies, Justice Hogan applied the approach laid out by the Tax Court of Canada in O.A. Brown Ltd. v. Canada² and affirmed by the Supreme Court of Canada in Calgary (City) v. Canada³. The test to determine whether a given transaction comprises a single supply or multiple supplies is to ask whether the ostensibly separate supply was an integral part of the other supply, such that in reality there was only one supply. To answer this question, Justice Hogan referred to certain factors, such as the degree of interconnection and interdependence of the supplies and whether each supply could be purchased individually and still be useful.

Applying these factors, Justice Hogan concluded that there had been two separate supplies. He observed that the transaction could have been structured differently: Casa Blanca could have sold the rights under the promise to purchase to the Assignees and the Assignees could then have paid a deposit to the developer, who would then have refunded Casa Blanca's original deposit. Accordingly, the two elements of the transaction were "not so interconnected as to indicate a single supply".⁴

Having reached this conclusion, Justice Hogan then determined that the supply of the rights in respect of the deposit was not taxable. The deposit conferred the right to have the deposited money used in three ways: it could be applied against the purchase price in the eventual sale, used as liquidated damages in the event that the Assignees decided not to go through with the sale or refunded in the event that the developer did not complete the construction on time. Justice Hogan regarded this last use as being an implied term of the promises to purchase, despite the fact that they explicitly stated that the deposits were non-refundable. Having so found, he held that the supply of the deposit was a supply of a debt security, and therefore an exempt supply of a financial instrument. In the alternative, he held that the deposit was a beneficial interest in money, and that since money does not qualify as either a property or a service, the transfer of the deposit would not even constitute a supply.

Footnotes

1. Casa Blanca Homes Ltd. v. The Queen, 2013 TCC 338.

2. [1995] G.S.T.C. 40.

3. 2012 SCC 20.

4. Supra note 1 at para. 19.

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