BC PST – A victory for real estate entrepreneurs
At the end of March, the Supreme Court of British Columbia released its decision in Chemainus Gardens RV Resort Ltd. against the queen, 2020 BCSC 478. The decision is potentially of great help to contractors in British Columbia who install property that becomes part of the building. This includes contractors supplying a wide range of products from materials that are typically part of a building (carpeting, plumbing, flooring, roofing) to larger items more commonly purchased as a single unit and installed (such as fireplaces , furnaces and large buildings). in refrigeration units).
The claimant in this case was Chemainus Gardens RV Resort Ltd. (“Chemainus”). Chemainus ran a residential community. She purchased residential trailers exempt from BC PST, claiming the exemption for purchases of goods for resale. Chemainus placed the trailers on a leased site and connected the trailers to electrical, water and sewage services. Chemainus then resold the trailers to customers. At the same time, the customers entered into lease agreements to lease the space for the trailers from a company related to Chemainus, which owns the land. Chemainus collected and remitted PST on its sale of trailers to customers.
BC audited and assessed Chemainus’ PST and interest in excess of $230,000 for the period January 1, 2014 to July 31, 2017. BC’s position was that the trailers were secured to the land so that they became a fixed element, and therefore part of the building. .
The legal background is not for the faint-hearted. Under BC Provincial Sales Tax Act (“TSPA”), the default rule is that contractors who purchase goods for the purpose of performing contracts for the supply and installation of home improvements must pay PST on their purchase of the goods. In turn, they do not charge PST on the “resale” of goods that have been installed. Indeed, these subcontractors are treated as the final “user” of the goods (as defined in the PSTA) before losing their character as tangible personal property and become fixtures (real property) under common law principles.
There is, however, an option to modify the application of the default rules via section 79 of the PSTA. In short, section 79 allows the entrepreneur to avoid PST on purchase but to charge PST on resale to his customer if:
- the property in question will become part of the common law property;
- there is an agreement between the contractor and its customer which specifically states that the customer will be liable for “tax imposed under section 80” (section 80 essentially imposes PST on the contractor’s customer if it exists an agreement under Article 79);
- the contract fixes the price of the good; and
- there is written evidence of the agreement referred to in points (b) and (c).
Two issues were before the Court:
- Have trailers retained their commodity status or have they become essentials?
- If trailers have become essential, has Chemainus managed to transfer the responsibility of paying the PST to its customers?
If the trailers retained their commodity status or if Chemainus succeeded in transferring the responsibility for paying the PST to its customers, the appeal should be allowed.
The BCSC sided with Chemainus on both grounds (except for approximately $5,000 which Chemainus claimed was payable). First, the Court found that the trailers retained their status as commodities and did not form part of a building. The Court notes that it is difficult to accept that customers pay such large sums to buy trailers to be placed on land that does not belong to them. Additionally, and perhaps of greater legal significance, the installation of connections between the trailer and the land (e.g. water and sewer connections) was intended to take better advantage of the use of trailers, not land. In any case, these links could be severed relatively easily.
More interestingly for PST purposes, the Court also found that even though the trailers had become fixtures, Chemainus met the requirements of Section 79 of the PSTA and transferred the responsibility to pay PST to its customers. In each of Chemainus’ sales contracts with its customers, Chemainus had fixed the purchase price and indicated the 7% PST payable by the customer. In doing so, the Court rejected British Columbia’s position that simply stating and referring to the 7% PST was not sufficient. That is, British Columbia argued that the Chemainus agreements were insufficient to transfer tax liability because they did not specifically refer to section 80, and the rule in section 79 requires agreements to state that purchasers are “liable for tax imposed under section 80”. The Court disagreed, noting that whether the tax is imposed under the General Billing Provision (Section 37) or Section 80, the “tax” is the same – BC PST. The Court rejected British Columbia’s argument that the explicit reference to Section 80 is significant because customers have four years under the PSTA to seek a refund of tax paid in error, noting that Chemainus customers had a legal obligation to pay PST pursuant to Section 80 of the PSTA since Chemainus had successfully transferred liability to pay to customers pursuant to Section 79. The tax was not paid by error and Chemainus customers had no right to reimbursement.
The Court’s decision is welcome and seems sensible. Many small business owners make mistakes in applying PST to their contracts. In trying to comply with tax rules, small business owners and staff assume that when they post a position for a piece of equipment purchased by a customer, they have to add a PST charge. During the audit, the contractor is assessed for non-payment of PST on its purchase of goods supplied to customers, and receives no credit for the PST collected from the customer. This is a very common and severe result, and all the more difficult to swallow as the old PST under the Social Services Tax Act provided a sensible solution – he considered that the payment of PST by customers satisfied the contractor’s liability for PST on his purchase of the goods in question.
This solution was removed from the tax structure when the PST returned in 2013, and so one would hope that a court would reasonably interpret the 79/80 alternative, as in Chemainus Gardens. The vast majority of customers will not know what “Section 80” refers to and will not understand what they are paying if agreements refer to “Section 80 tax”. However, they most likely understand what “PST” means. An agreement setting out the purchaser’s obligation to pay “PST” should therefore be sufficient to satisfy the requirements of section 79.
The Court’s decision contrasts with its previous decision in Maxwell’s Plumbing and Heating Ltd. vs. British Columbia2016 BCSC 1098. In this case, the Court held that an invoice showing PST charges was not sufficient to constitute an agreement to assume liability for PST under Section 79. In Maxwell’s plumbingthe Court noted that any agreement must “specifically state” that the customer is liable for tax under section 80. However, Chemainus Gardens does not discuss or refer Maxwell’s plumbing. The caller in Maxwell’s plumbing represented himself, which may have been a contributing factor.
In theory, if a contractor has not transferred the responsibility to pay the PST to its customer, the contractor can ask its customers, following an assessment, to enter into an agreement under section 79. In reality, however, a company rarely would. It’s difficult to collect taxes months or even years after a sale is made, especially if an entrepreneur has to contact thousands of customers. In many cases, these entrepreneurs have to pay the PST out of pocket. For small businesses, such an assessment can mean the difference between bankruptcy and survival.
On July 8, 2020, the Ministry of Finance announced that effective February 19, 2020, real estate contractors who supply and affix or install goods so that they form part of real estate located outside of Colombia British can claim a refund of the PST they paid on these goods. The proposed amendment is subject to legislative and regulatory approval. The proposed change will have no impact on contractors installing goods in British Columbia.
So far, leave to appeal the Chemainus Gardens decision has not been filed.