In a prior blog post, we discussed the decision of the BC Supreme Court (“BCSC”) in Chemainus Gardens RV Resort Ltd. v. British Columbia (Attorney General), 2020 BCSC 478. The case is of particular interest because it rejected the BC Ministry of Finance’s controversial interpretation of how BC’s provincial sales tax (“PST”) applies to aspects of billing under contracts for the supply and installation of improvements to real property. The BCSC sided with the petitioner, Chemainus Gardens RV Resort Ltd. (“Chemainus”).
The BCSC decision was appealed and affirmed by the BC Court of Appeal (“BCCA”) in October of 2021 (2021 BCCA 402). On January 19, 2022, however, the Province of BC announced its intention to legislatively undo the effect of the court decisions.
What will be the impact of these proposed amendments to businesses in BC? This post summarizes the relevant statutory framework, the BCCA’s decision, the proposed amendments to the Provincial Sales Tax Act (the “Act”), and its implications for real property contractors in BC.
Statutory Framework and Rules for Real Property Contractors
Under section 37 of the Act, PST is imposed on purchasers of tangible personal property (“TPP”) at a sale in BC, unless an exemption applies. Purchaser in the Act is defined to exclude a person who acquires TPP for resale, but to include a person who acquires TPP for the purpose of using it to fulfil a contract for the supply and installation of improvements to real property, referred to as a “real property contactor”. Accordingly, a real property contractor is liable to pay PST on materials and goods (i.e., TPP) that it will install to become part of the realty – unless an exemption applies.
One of those exemptions is found in section 79 of the Act, which exempts a contractor from paying PST on its purchase of TPP where the contractor’s customer agrees to pay the tax. Where there is such an agreement, tax is imposed on the customer under section 80. In other words, a real property contractor may, through an agreement with its customers, shift the liability to pay PST away from itself.
In order to shift the liability to the customer, the agreement must meet certain requirements set out in section 79. In particular, the agreement must:
(i) specifically state that the customer is liable for tax imposed under section 80;
(ii) set out the purchase price of the TPP that is subject to tax imposed under section 80 (i.e., the TPP that is to be installed as an improvement to real property); and
(iii) be evidenced in writing.
Summary of BCCA Decision
This case represents the first appellate-level authority regarding the proper interpretation of the tax exemption in section 79 of the Act. In rejecting the Province’s narrow reading of section 79, the BCCA took a common sense approach to statutory interpretation.
While our prior blog post should be consulted for a more detailed discussion of the facts and analysis underlying the BCSC decision, a summary of the background leading up to the appeal is included below.
Chemainus managed a residential community. It leased land from a related corporation and licensed or sub-leased specific sites on the land to customers who also purchased trailers from Chemainus. Those customers entered into two separate agreements with Chemainus: one regarding the purchase of the trailer, which also contemplated the trailer being delivered to a specific site within the residential community; and a second for the monthly fees covering the use of the site and associated utilities.
Following the purchase, the trailer was placed on a gravel pad on the subject site and then attached to electricity, water and sewer connections. Material referred to as “skirting” was applied between the trailer and the ground to conceal the water and sewer connections. Wooden stairs and decking were often installed around the trailers. Although customers were also entitled to remove their trailers from the community, most customers did not and remained in the community.
Chemainus did not pay PST on its purchase of the trailers. Instead, when it resold the trailers to the customers, the customers paid PST under the purchase agreement, which Chemainus collected and remitted to BC.
Chemainus’ approach to PST was correct if either: (1) the trailers retained their status as TPP following placement at the site, or (2) the trailers became fixtures, but the parties had shifted the liability for PST to the customer under section 80. The Province rejected both positions and assessed on the basis that it was Chemainus, and not its customers, who was liable for payment of PST on the trailers. Thus, the case before the courts was whether Chemainus was liable for PST on the purchase of the trailers it resold to its customers.
Chemainus won at the BCSC and the Province filed a further appeal. The BCCA, however, dismissed the appeal. While the Court addressed multiple issues, of most interest were the Court’s comments on whether Chemainus’ agreements with its customers met the requirements of section 79 of the Act. This determination turned on whether, as a matter of statutory interpretation, section 79 required that the purchase agreement specifically state that the customer was responsible for “tax imposed under section 80”. Prior to this decision, there was no direct appellate authority on this question. The BCCA had granted leave to appeal primarily in order to opine on the correct interpretation of section 79.
The BCCA found that the express use of the words “tax imposed under section 80” was not required, taking into consideration the ordinary meaning of the words, the surrounding context, and the object of the provision. The court noted that the term “PST” is not defined in the Act to mean tax imposed under any particular section. Therefore, a reference to “PST” is sufficiently broad to include tax imposed under section 80 and is colloquially understood to mean all sales taxes imposed under the Act. In coming to this decision, the BCCA applied the modern approach to statutory interpretation, which is “to favour ordinary, non-technical or literal meanings”.
The Province argued that requiring purchase agreements to contain the exact phrase “tax imposed under section 80” would increase administrative efficiency, as it would allow the province to more easily determine the party that ought to pay the tax. The BCCA rejected this argument, noting that “[w]hether a particular interpretation is administratively efficient for the Ministry of Finance is not conclusive as to the correct interpretation of the provision”.
Aftermath of Chemainus Gardens and Proposed Legislative Amendments
Ultimately, Chemainus Gardens represented a win for common sense. One may wonder why the Province proceeded with its appeal of the BCSC’s decision. Except for a small amount of PST which Chemainus failed to remit (which was conceded by Chemainus), there was no tax loss to the Province. PST was paid on the trailer sales by the customers, which Chemainus dutifully remitted . Further, customers had no right of refund.
Nevertheless, just a few months after the BCCA decision, the Province has now announced its intention to introduce legislative amendments to undo Chemainus Gardens. In Notice 2022-001 dated January 19, 2022, the Province notes that it intends to introduce legislation that “supports how it administered the legislation prior to the court case” and “enhances certainty for real property contractors and their customers by clarifying the evidentiary requirements for using the exception rule for both past and future contracts” (emphasis added). In essence, the Province intends to amend the law such that agreements between real property contractors and customers must specifically refer to “tax under section 80 of the Provincial Sales Tax Act” before PST liability can be shifted from the contractors to the customer, notwithstanding the BCCA’s conclusion that having a contract mention “PST” makes it sufficiently clear that the parties intend the customer to pay PST.
More significantly, the Province’s comment about “enhanc[ing] certainty” with respect to “past…contracts” suggests that these amendments will come into force with retroactive effect. As such, real property contractors who have contracts with customers for past transactions that only mention “PST” instead of “tax under s. 80 of the Provincial Sales Tax Act” may not be able to rely upon Chemainus Gardens. Such contractors would thus still be at risk of an assessment for failure to pay PST.
Unfortunately, the proposed retroactive application of these amendments will cause many businesses grief. In addition, it is important to recognize that under the PST a “real property contactor” includes not only construction companies but also locksmiths, painters and plumbers, not to mention a broad range of retailers that supply and install home improvements such as fireplaces, appliances and carpets. Those persons itemize the goods sold on their invoices and commonly assume in error that they must charge PST. As noted in our prior blog post on the Chemainus Gardens BCSC decision, while in theory a contractor who has failed to shift liability to pay PST to its customer may ask its customers to enter into a section 79 agreement after an assessment, in reality a business would rarely do so. It is difficult to track down potentially thousands of customers years after a sale has concluded. The result is that the contractors are left to pay the PST out-of-pocket. Typically, the Province receives a windfall since the contractor has charged PST to the customer but the assessment of a contractor does not trigger a refund to the customer unless the individual is aware of the refund right. These assessments could thus place a very unfair burden on some small businesses.