At the end of March, the BC Supreme Court released its decision in Chemainus Gardens RV Resort Ltd. v The Queen, 2020 BCSC 478. The decision is potentially of great assistance to contractors in BC who install goods that become a part of realty. This includes contractors providing a vast array of products ranging from materials that commonly become part of a building (carpeting, plumbing, flooring, roofing) to larger items more commonly bought as one unit and installed (such as fireplaces, furnaces, and large built-in refrigeration units).
The petitioner in this case was Chemainus Gardens RV Resort Ltd. (“Chemainus”). Chemainus managed a residential community. It purchased residential trailers exempt of BC PST, claiming the exemption for purchases of goods for resale. Chemainus placed the trailers on a rented site and connected the trailers to electrical, water and sewage disposal services. Chemainus then resold the trailers to customers. At the same time, the customers entered into lease agreements to rent the premises for the trailers from a related corporation of Chemainus, the owner of the land. Chemainus collected and remitted PST on its sale of the trailers to customers.
BC audited and assessed Chemainus PST and interest in excess of $230,000 for the period between January 1, 2014 and July 31, 2017. BC’s position was that the trailers became affixed to the land such that they became a fixture, and hence part of the realty.
The legal background is not for the fainthearted. Under BC’s Provincial Sales Tax Act (“PSTA”), the default rule is that contractors who purchase goods for the purpose of fulfilling contracts for the supply and installation of improvements to real property must pay PST on their purchase of the goods. In turn, they do not charge PST on the “resale” of the goods that have become installed. This is because such contractors are treated as the final “user” of the goods (as defined in the PSTA) before they lose their character as tangible personal property and become fixtures (real property) under common law principles.
There is an option, however, to change the application of the default rules through section 79 of the PSTA. In brief, section 79 allows the contractor to avoid PST on purchase but charge PST upon resale to its customer if:
- the goods at issue will become a part of the real property at common law;
- there is an agreement between the contractor and their customer that specifically states the customer will be liable for “tax imposed under section 80” (section 80 essentially imposes PST on the contractor’s customer if there is a section 79 agreement);
- the agreement sets out the price of the good; and
- there is written evidence of the agreement referred to in (b) and (c).
Two issues were before the Court:
- Did the trailers retain their status as goods or had they become fixtures?
- If the trailers became fixtures, did Chemainus successfully transfer liability to pay PST to their customers?
If the trailers retained their status as goods or if Chemainus successfully transferred liability to pay PST to its customers, the appeal was to be allowed.
The BCSC sided with Chemainus on both grounds (with the exception of roughly $5,000 which Chemainus conceded was payable). First, the Court found that the trailers retained their status as goods and did not become part of real property. The Court noted that it was difficult to accept that customers would pay such significant amounts of money to purchase trailers to affix to land they did not own. Moreover, and perhaps of greater legal significance, the purpose of installing the connections between the trailer and the land (e.g. the water and sewage connections) was to better enjoy the use of the trailers, and not of the land. In any event, those connections could be relatively easily severed.
More interesting for PST purposes, the Court also found that even if the trailers had become fixtures, Chemainus satisfied the requirements in section 79 of the PSTA and had transferred liability to pay PST to its customers. In each of Chemainus’ sale contracts with its customers, it had set out the purchase price and indicated the 7% PST payable by the customer. In doing so the Court rejected BC’s position that merely setting out and referring to the 7% PST was not enough. That is, BC argued that Chemainus’ agreements were insufficient to transfer the liability for tax because they did not specifically refer to section 80, and the rule in section 79 requires that the agreements state that the buyers are “liable for tax imposed under section 80”. The Court disagreed, noting that regardless of whether the tax is imposed under the general charging provision (section 37) or section 80, the “tax” is the same – BC PST. The Court dismissed BC’s argument that the explicit reference to section 80 is important because customers have four years under the PSTA to claim a refund for 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 the customers pursuant to section 79. The tax was not paid in error and Chemainus’ customers had no refund right.
The Court’s decision is a welcomed one and seems sensible. Many small contractors make errors in the application of PST to their contracts. In trying to comply with the tax rules, small business owners and staff assume that when they show a line item for a piece of equipment being purchased by a customer, they should add a PST charge. On audit, the contractor is assessed for failure to pay PST on its purchase of goods being supplied to customers, and is given no credit for the PST collected from the customer. This is a very common and harsh result, and one that is all the more hard to swallow given that the old PST under the Social Service Tax Act provided a common sense solution – it deemed the customers’ payment of PST to satisfy the contractor’s liability for PST on its purchase of the subject products.
That solution was deleted from the tax structure when the PST returned in 2013, and thus one would hope that a court will interpret the section 79/80 alternative reasonably, 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 the agreements refer to “section 80 tax.” However, they most likely understand what “PST” means. An agreement setting out the purchaser’s liability to pay “PST” therefore should be sufficient to satisfy the requirements in section 79.
The Court’s decision stands in contrast to its previous decision in Maxwell’s Plumbing and Heating Ltd. v British Columbia, 2016 BCSC 1098. There, the Court held that an invoice showing a PST charge was not enough to constitute an agreement to assume liability for PST under section 79. In Maxwell’s Plumbing, the Court noted that any agreement needed to “specifically state” that the customer is liable for tax under section 80. However, Chemainus Gardens does not discuss or reference Maxwell’s Plumbing. The appellant in Maxwell’s Plumbing was self-represented, which may have been a contributory factor.
In theory, if a contractor failed to shift liability to pay PST to its customer, the contractor may ask its customers subsequent to an assessment to enter into a section 79 agreement. In reality, however, a business would rarely do so. Collecting tax months or even years after a sale has concluded is difficult to do, especially if a contractor would have to contact thousands of customers. In many cases, such contractors are left to pay the PST out-of-pocket. For small businesses, such an assessment can be the difference between bankruptcy and survival.
On July 8, 2020, the Ministry of Finance announced that, effective February 19, 2020, real property contractors who supply and affix or install goods so that they become part of real property situated outside BC can apply for a refund of PST they paid on those goods. The proposed change is subject to legislative and regulatory approval. The proposed change will not impact contractors who install goods in BC.
Thus far, leave to appeal of the Chemainus Gardens decision has not been filed.