Section 254 of the ETA allows the purchaser of a new residential unit to claim a partial GST/HST Rebate (often called a New Housing Rebate – “NHR”). The NHR was intended to off-set GST/HST payable on new housing, back to the point where the GST/HST actually paid on the purchase of new housing equates, more-or-less, with the expected former federal sales tax (“FST”) component of comparable housing. The NHR was designed to ensure that the GST did not pose a barrier to affordable housing.
The NHR is only available where the builder makes a supply by sale to a person, which makes that person a “particular individual” for purposes of the NHR rules (s. 254(2)(a)). The particular individual (or their relation) generally must be first to occupy the new home as their primary residence (s. 254(2)(d)(i)). Each buyers of a new home (i.e. each particular individual) must meet each NHR requirement (s. 262(3)). Where new home ownership structures are slightly complicated, meeting these requirements can become tricky.
This was the issue in Crooks v. The Queen (2016 TCC 52).
In Crooks, the Appellant, Ms. Crooks, executed an Agreement of Purchase and Sale (“APS”) with a builder in 2010. By 2012, Ms. Crooks’ credit rating declined, such that in order to obtain financing, the mortgagee required Ms. Crooks to have a co-signor. She approached her friend, Ms. Richards, to co-sign the mortgage. Ms. Richards agreed co-sign the loan “as a gratuitous act offered out of trust and love and affection” and she did not want anything in return. One month before possession and title transfer, an amended APS was executed that added Ms. Richards as a purchaser and title to the house transferred from the builder to Ms. Crooks for 99% and to Ms. Richards for 1%.
Ms. Crooks applied for the NHR, which CRA denied on the basis that Ms. Richards purchased the house from the builder, making her a “particular individual” under s. 254(2)(a), such that she too had to meet all NHR requirements for the NHR to be available. As Ms. Richards never occupied or intended to occupy the home, she did not meet the s. 254 (2)(g) NHR requirement. Ms. Crooks appealed to the TCC.
The TCC allowed the appeal, concluding that Ms. Crooks was entitled to the NHR. It concluded that ownership of the house was only transferred to Ms. Crooks and that the 1% transfer to Ms. Richards was a supply made by Ms. Crooks (not the builder) to Ms. Richards. This implied that the only “particular individual” for the purposes of the NHR provision was Ms. Crooks, and she was the only individual who had to meet the NHR requirements. Although this could have been the end of the analysis, the TCC further noted that under s. 254(2)(a), it is only where the builder makes a “supply by sale” to an individual, that that person will be a particular individual and that where no consideration is paid to the builder by an individual, no supply by sale was made. Given that Ms. Richards did not pay consideration to the builder, she was not a “particular individual”. Further, according to the TCC, Ms. Richards was not a “recipient” (as she was not liable to pay the builder) such that a supply of the house by the builder was not made to her.
The TCC noted that it was not required to follow the previous decision in Al-Hossain (2014 TCC 379), which upheld CRA’s denial of the NHR in virtually identical circumstances. It also noted that there were distinguishing factors in that case in any event, such as the fact that the builder (not the mortgagee) took the initiative to suggest that the co-signor be added as a purchaser.
Perhaps the most refreshing part of this decision is the TCC’s insistence on focusing on the purpose behind the NHR. It noted that Ms. Crooks is “exactly the kind of party who was intended to benefit from” the NHR and that “Parliament surely did not intend to block this economic incentive in factual situations like the one at bar.” Further, “[t]hese situations beg for findings that support the allowance of the incentive.” The TCC even noted that even if its findings of fact and law were “overly generous… it would not be inappropriate if the result is to give effect to benefit-conferring legislation.” The Court encouraged CRA and the Department of Justice to reconsider its approach in these types of cases.
In our view, this decision is a welcome approach to dealing with these frequent NHR appeals and hopefully initiates a trend of taking a less strict interpretation of these rules. There is no logical policy reason why an individual in Ms. Crooks’ circumstances should not be entitled to the NHR. In fact, CRA’s position in these types of cases implies that those who require a co-signor (who theoretically have less access to credit and therefore are less likely to be able to afford housing) will have to pay comparatively more for new housing than those individuals who have the financial stability to access credit without a co-signor. In practice, CRA’s approach generally results in an additional surprise payment for such a purchaser in the tens of thousands of dollars after the home is purchased. This is the complete opposite of Parliament’s intention (not to mention bad policy).
That being said, these cases should serve as a warning to new home buyers, their advisors and their mortgagees, to be aware of the potential consequences of transferring title to mortgage co-signors. Being an informal procedure appeal, the Crooks decision has no precedential value, and it is possible that CRA will continue to take the same strict approach, which other TCC judges have agreed with in the past.
A version of this article appeared in the March edition of the GST & Commodity Tax Newsletter.