Executive Summary: Key Legal and Evidentiary Issues

• The Appellant purchased a mixed-use building for $425,000 and disputed the GST assessment on the first-floor commercial unit, arguing his intent to convert it to residential use rendered it exempt.

• Revenu Québec assessed $10,625 in GST plus a $425 failure-to-file penalty under the Excise Tax Act for the reporting period ended July 31, 2019.

• Whether the first floor qualified as a "residential complex" at the time of sale was central to the exemption analysis, with the Court concluding it did not meet the statutory definition.

• Applicability of the subsection 9(2) exemption for individual sales of real property was examined, with the Court finding the property was last used in a business, thereby excluding it from exemption.

• Revenu Québec's retroactive cancellation of the Appellant's GST registration raised jurisdictional questions about the Tax Court's authority to review discretionary administrative decisions.

• The appeal was partially allowed: the GST assessment was upheld but the $425 penalty was vacated because the retroactive cancellation relieved the Appellant of the filing obligation.

The purchase of the building and the GST dispute

On July 11, 2019, John Moseley acquired a two-storey building located at 917-919 Duluth East Avenue, Montreal, QC H2L 1B7 for a total purchase price of $425,000 from two individuals. The second floor of the building contained a residential apartment, while the first floor contained an abandoned restaurant. Each floor was acquired for a purchase price of $212,500. Under the Deed of Sale, the second-floor residential unit was exempt from GST because it was a used residential complex, but the first-floor commercial space was taxable. Because the Appellant was registered for GST purposes, the Deed of Sale indicated that the vendors were not required to collect tax in respect of the supply of the first floor pursuant to paragraph 221(2)(b) of the Excise Tax Act. Instead, the Appellant was required to report the transaction and remit any GST owing pursuant to paragraph 228(4) of the ETA.

The Appellant's position and the assessment

The Appellant took the position that the sale of the first floor was, like the sale of the second floor, exempt from GST because he intended to, and did in fact, turn it into a residential apartment which he rented out to his son for half the market rent. He specified that he began the work of converting the first floor into an apartment immediately after closing. For these reasons, he did not pay any tax in respect of its sale and did not file the return referred to in subsection 228(4). The Appellant also testified that the restaurant formerly operated on the first floor had been vacant for approximately 18 months at the time he purchased the building. On December 11, 2023, Revenu Québec assessed the Appellant for $10,625 of GST (5% of the portion of the purchase price attributable to the first floor), as well as a $425 failure to file penalty levied under subsection 280.1 of the ETA. The Appellant filed a notice of objection to this assessment, and when it was confirmed, filed a notice of appeal to the Tax Court of Canada, representing himself.

The residential complex exemption analysis

Justice Rabinovitch rejected the Appellant's argument that his intention to convert the first floor into a residential unit rendered the supply exempt. The Court explained that under the ETA, all taxable supplies are subject to GST, and all supplies of real property are subject to GST unless they qualify as exempt supplies. The term "exempt supply" is defined in the ETA as a supply included in Schedule V. Although sections 2 to 5.2 of Part I of Schedule V cover a variety of supplies by way of sale of a "residential complex," not all supplies of residential complexes are exempt, as each provision requires certain conditions to be met. The Court found it unlikely any of the exemptions in question would be applicable here even if the first floor constituted a residential complex at the time it was sold. More fundamentally, the Court emphasized that in order to be covered by residential complex exemptions in Part I of Schedule V, the relevant property must already be a residential complex at the time it is sold to the recipient, and that the recipient's intended use of the property is not relevant. A "residential unit" under the ETA is defined as a property that is occupied by an individual as a place of residence or lodging, supplied for occupancy as such, vacant but last occupied or supplied as such, or has never been used but is intended for such use. The first floor did not meet any of these requirements on July 11, 2019. Accordingly, it was not a residential complex.

The subsection 9(2) exemption and its exceptions

The Court then considered whether the exemption set out in subsection 9(2) of Part I of Schedule V applied to the sale of the first floor. This exemption covers supplies of real property by way of sale by an individual, unless one of a series of exceptions apply. The relevant exception in paragraph 9(2)(a) excludes from the exemption any supply of real property that is, immediately before the time ownership or possession is transferred, capital property used primarily in a business carried on with a reasonable expectation of profit, or if the individual is a registrant, in making taxable supplies by way of lease, licence or similar arrangement. Despite the first floor being vacant at the time of sale, the Court adopted the CRA's interpretation that property must always be considered to have a use, and that property last used for a given purpose and not applied to a new purpose must be considered to continue to be used for that purpose — in other words, the CRA interprets "used" in subsection 9(2) as "held for use" or in essence "last used." Justice Rabinovitch found this interpretation supported by the legislative context and purpose: only transactions with a certain level or degree of commerciality are intended to be subject to GST. Property temporarily vacant because the business or rental activities it was formerly used for have been or are being wound down is not personal-use property, and a sale of such property is not a non-commercial transaction. The Court cited subsection 141.1(3) of the ETA, which states that anything done in connection with the disposition or termination of a commercial activity is deemed to have been done in the course of that activity. The Department of Finance technical notes further confirmed this rationale, stating that the seller would have been entitled to claim input tax credits in respect of the property or improvements to it, and therefore it is not appropriate that the subsequent sale of the property be exempt. Because the first floor was held for use or last used by the vendors to carry on business or make taxable supplies by way of lease immediately before the purchase, subsection 9(2) did not apply.

The retroactive cancellation of GST registration

A significant complication arose from the fact that on February 11, 2020, Revenu Québec had cancelled the Appellant's GST registration with retroactive effect to September 14, 2006 — well before the 2019 purchase. It should be noted that this registration had not been obtained in connection with the Appellant's purchase of the building. If effective, this cancellation would have prevented the sale of the first floor from meeting the conditions set out in paragraph 221(2)(b) of the ETA, since the Appellant would not have been registered at the time of closing. Accordingly, it would have been the vendors that were obligated to collect and remit the tax, not the Appellant. The Court found it did not have jurisdiction to rule on the validity of Revenu Québec's decision. The power to de-register under subsection 242(1) of the ETA is discretionary. Citing the Supreme Court of Canada's rulings in Canada (Minister of Citizenship and Immigration) v. Vavilov and Dow Chemical Canada ULC v. Canada, Justice Rabinovitch noted that discretionary decisions are to be reviewed on a standard of reasonableness, and that the Tax Court is ill suited to perform this type of review. The Court also noted that section 18.5 of the Federal Courts Act makes clear that the exclusive jurisdiction of the Federal Court to conduct judicial review cannot be ousted by necessary implication. Justice Rabinovitch also declined the Respondent's suggestion to interpret "registered under Subdivision D" in paragraph 221(2)(b) to include a person whose registration is valid as a matter of fact when the relevant transaction occurs, and only ceases to be valid as a matter of law due to a decision to cancel it retroactively. The Court reasoned that adopting such an interpretation would effectively amount to a finding that Revenu Québec's decision does not apply for the purposes of paragraph 221(2)(b), and that the Respondent was fundamentally asking the Court to do indirectly what it cannot do directly. The Court did express concern that the relevant third parties will rarely be in a position to bring an application for judicial review, since they will be unaware of the retroactive cancellation until they are assessed and it is too late to do so, noting this is something Parliament may wish to address.

The ruling and outcome

Notwithstanding the registration cancellation, the Court upheld the Minister's authority to assess the Appellant directly for the GST owing under paragraph 296(1)(b). Relying on the Federal Court of Appeal-affirmed precedent in Carlson & Associates Advertising Ltd. v. Canada, the Court confirmed that paragraph 296(1)(b) gives the Minister the authority to directly assess the recipient of a taxable supply in order to satisfy the debt in respect of unpaid GST. The assessment for the tax issued against the Appellant by the Minister was therefore still valid. However, the $425 penalty was not upheld: as a result of Revenu Québec's retroactive cancellation of his registration, the Appellant was not required to file any return pursuant to paragraph 228(4)(b), and there had therefore not been any failure to file. The appeal of John Moseley was allowed without costs and referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant was liable for the $10,625 GST owing in respect of the portion of the purchase price attributable to the first floor but not any penalties. Given the somewhat mixed result, and that the appeal was governed by the Informal Procedure, no costs were awarded to the Respondent.