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Tax Planning Needs Proper Implementation

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The first class in Tax law 101 features a discussion on the Duke of Westminster ([1936] A.C. 1), wherein the Appeals Court of England ruled that:   “Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be.”

Even in Canada today, home of what some would say much over-regulation, it remains generally permissible for taxpayers to structure their affairs in a more tax effective manner.  (Lest we over-generalize, an exception does exist for abusive tax planning, which the CRA refers to as "tax avoidance").

As is often the case with tax planning, however, implementation is the key.

Many clients do not appreciate the criticality of implementation, often assuming some magic comes from the opinion provided by the tax lawyer or generalist accountant, that will bless whatever actions they undertake.  The reality, however, is that implementation is a critical component of effective tax planning, and incorrect implementation can thwart even the best laid plans, as found out by the taxpayer in GF Partnership v. The Queen (2013 TCC 53).

In GF Partnership, the taxpayer was a residential home builder/developer operating under the name Mattamy Homes (“Mattamy”). Mattamy hired a consultant who had claimed to have been successful at reducing the GST on new houses by having the purchasers of the residential homes pay the municipal development charges directly – as such charges are not subject to GST. In the past it had been Mattamy’s practice to pay the development charges, and add same to the price of the new residential house, increasing the price of the house as well as the GST.

The consultant modified Mattamy’s standard form purchase and sale agreements and began implementing the tax plan in mid-2001. The Minister reassessed Mattamy for the periods from June 1, 2001 to May 31, 2006 on the basis that the development charges were not paid for by homeowners, but that Mattamy paid the charges and recouped the cost through the purchase price of the house.

The Tax Court of Canada (“TCC”) began its analysis by generally reviewing the development and building process, including the statutory basis for development charges, followed by a specific review of the way development charges were handled by Mattamy. Although particular facts vary by municipality, the Court found that that purchase agreements were entered into between Mattamy and individual purchasers both before and after development charges were paid to the municipality.

The purchase agreements contained a clause which indicated “as part of and included in the purchase price” the Vendor had paid all taxes, development charges etc. “on behalf of the purchaser” and authorizing the vendor to show these amounts separately on the statement of adjustments prepared for closing. In the statement of adjustments, the purchase price from the purchase agreement was referred to as the “sale price” and development charges were deducted from same, while extras and other charges were added, to result in a “total sale price”. The development charges were then shown as separate items to be paid by the purchaser.

The TCC found that the Purchase Agreements were not explicit enough to make the purchasers liable for the development charges – at best the language was ambiguous. When reading all clauses harmoniously, the Court concluded that they implied that Mattamy paid the development charges “on its own account, but for the ultimate benefit of the purchasers”. Mattamy’s position was further undermined by the fact some development charges had been paid before a Purchase Agreement had been entered into, and the lack of a provision holding the purchaser liable for development charges where they terminate the Purchase Agreement. The Statement of Adjustments were irrelevant to the inquiry as these Statements were all agreed to after the development charges had already been paid.

By way of commentary, this case seems like an example of a situation in which the client (or more accurately the consultant) had a plan, but failed to implement documents and procedures necessary to provide evidence of agreement and understanding of the concerned parties (and particularly, necessary to make the purchasers directly liable for the development charges, on their own account). Lacking compelling oral evidence, a historical course of conduct, an existing relationship between the parties or some other form of evidence, the taxpayer was in a weak position going into the TCC in the first place. And it is hard to fault the TCC (Justice Woods in this case), for the decision reached on the facts.

One might also question whether the Consultant’s plan was well-founded to begin with. The Purchase Agreement presented by Mattamy would appear to be generally inconsistent with the common understanding of a residential purchase agreement as one for the supply of real property – a home and land. All of the inputs to that supply of real property: nails, shingles, wiring, development charges, etc. are all proper inputs and expenses of the builder. Making the purchaser liable for any one of these inputs would be generally inconsistent with an agreement to purchase real property, and would perhaps be more appropriate in the context of a contract for constructions services. As a result, even if the Purchase Agreements were explicit enough to make the purchasers liable for the development charges, the TCC could have still had reason to deny Mattamy the tax benefits it sought.

Perhaps the lesson is that when spending the time and effort to develop a tax plan, clients need to ensure that the plan is implemented appropriately, and spending some additional resources on a tax lawyer can prove invaluable in examining the plan and all aspects of its implementation through the lens of prior jurisprudence.

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Guest Wednesday, 23 October 2019

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