Victoria, The Rainbow: Condominium developer used cynical plan to strip assets and evade GST when condos fail to sell due to the effect of the leaky condo syndrome on the market

Weyand v. The Queen, 2004 TCC 355 (CanLII)

Parallel citations: (2004), [2006] 2 C.T.C. 2075
Reflex Record (noteup and cited decisions)




Docket: 2001-4516(GST)G











Appeal heard on June 25, 2003, at Victoria, British Columbia,


By: The Honourable Justice M.A. Mogan




Counsel for the Appellant:

Joseph Arvay and Matt Pollard


Counsel for the Respondent:

Kristy Foreman Gear





         The appeal from the assessment of goods and services tax made under the Excise Tax Act, notice of which is dated February 9, 2001, and bears number 32087 is dismissed, with costs.


Signed at Ottawa, Canada, this 10th day of May, 2004.




"M.A. Mogan"

Mogan J.




Citation: 2004TCC355

Date: 20040510

Docket: 2001-4516(GST)G











Mogan J.


[1]      The issue in this appeal is the possible liability of a director of a corporation under the goods and services tax ("GST") legislation which is part of the Excise Tax Act (the "Act"). The Minister of National Revenue assessed the Appellant under subsection 323(1) of the Act on the basis that she was a director of Value Developments Blackberry Road Inc. ("Blackberry"), a British Columbia corporation, when on or about May 31, 2000, Blackberry failed to remit net tax as required under subsection 228(2) of the Act. The most relevant provisions of the Act concerning the liability of a director are:


323(1) Where a corporation fails to remit an amount of net tax as required under subsection 228(2) or (2.3), the directors of the corporation at the time the corporation was required to remit the amount are jointly and severally liable, together with the corporation, to pay that amount and any interest thereon or penalties relating thereto.


323(2) ...


323(3) A director of a corporation is not liable for a failure under subsection (1) where the director exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.


The above statutory provisions are almost the same as comparable provisions in section 227.1 of the Income Tax Act.


The Facts


[2]      The Appellant and her husband, Jurgen Weyand, were born and raised in Germany. They were married in 1976 and have three children born in 1978, 1979 and 1987, respectively. In 1994, they decided to move their family from Germany to Canada and to reside in Victoria, British Columbia. They became permanent residents of Canada in February 1995. Mr. Weyand had been a real estate developer in Germany and so he decided to do the same thing in Victoria. In 1995, he incorporated ACT Active Capital Transactions Inc. (hereafter "ACT"), a British Columbia corporation, to deal with investments and finances while he looked for a parcel of land to develop.


[3]      In 1997, Mr. Weyand found some land in the suburb of Saanich, about 10 kilometres from downtown Victoria. The land was located near the intersection of McKenzie Avenue and the Patricia Bay Highway. He incorporated Blackberry to acquire title to the land and do the first project. Blackberry was incorporated in February 1998. It acquired the land near McKenzie Avenue; had it subdivided into three lots (two larger and one smaller) and planned to build on one of the larger lots. The total cost of the land was approximately $1,800,000. Blackberry obtained the plans for a residential condominium building with 39 units. The project was marketed under the name "the Rainbow at Christmas Hill" because of its proximity to a local landmark in Saanich. Exhibit A-2 is a copy of a brochure used to sell the 39 condominium units.


[4]      Construction began in early 1999 and was substantially completed by December 1, 1999. The campaign to sell the condominium units began in March or April 1999 while the building was still under construction. A professional real estate firm was retained to sell the units and an aggressive sales campaign was carried on through the last eight months of 1999. It is a fact, however, that only one of the 39 condominium units was sold around August 1999. Mr. Weyand said that they had good success in getting prospective buyers in to view the model suites; there was a grand opening of "the Rainbow"; there were many favourable comments about the qualify of the product; but only one purchaser.


[5]      There was buyer fear because of what Mr. Weyand called the "leaking condo crisis", mainly in Vancouver. The newspapers were full of stories about condominiums leaking whenever it rained; owners being assessed $50,000 or $60,000 by their condominium corporations to cover the cost of substantial building repairs; and sad stories about elderly people who lost their life savings if they could not pay the assessed amounts. A few other condominium projects in Victoria which came on the market at the same time as the Rainbow in late 1999 and early 2000 suffered the same fate of no sales. People were afraid to purchase condominium units because of the bad publicity throughout the media in Vancouver and Victoria.


[6]      The purchase of the land and the construction of the 39-unit condominium building was financed by ACT lending money to Blackberry. Exhibit A-1 is a copy of the mortgage granted by Blackberry to ACT on January 25, 1999 in the amount of $6,500,000. Mr. Weyand said the mortgage amount was not paid at one time but advanced in stages to pay for the cost of the land and to pay construction costs as they arose. Exhibit A-6 is a printed statement showing a cumulative balance of the amounts owing by Blackberry to ACT on the mortgage at any time from December 31, 1997 to May 26, 2000. Exhibit A-6 also shows the many amounts advanced by ACT to Blackberry and the relatively few amounts repaid by Blackberry to ACT. Mr. Weyand was able to identify in Exhibit A-6 the $50,000 down payment on the land in December 1997; the payment of $1,530,000 in July 1998 to close the purchase of the land; and the significant construction costs which started to accumulate from and after January 1999. From January 1 to December 31, 1999, the amount owed by Blackberry on the mortgage increased by approximately $3,400,000 from $1,951,000 to $5,346,000 representing mainly the cost of the building.


[7]      After the building was completed in early December 1999, there was a risk of theft or vandalism if a high quality residential building like the Rainbow remained unoccupied over a lengthy period of time. The couple who had purchased the one unit in August 1999 moved their furniture in on December 1 when the Rainbow was ready for occupancy, but then left for Arizona for the winter intending to return in April 2000. At first, Mr. Weyand would go over to the Rainbow in the evenings to turn certain lights on and off just to give the appearance that people were living there. In January 2000, he found a policeman and his wife who would move in, rent-free, and in return would make one or two rounds of the building every evening making sure that the real estate agents (still showing the suites) had closed and locked all doors and windows, and turning on selective lights to give an appearance of occupancy.


[8]      Having sold only one condominium unit, Blackberry was in financial trouble in January 2000. There were operating costs to maintain the building and holding costs to service the big mortgage to ACT. In desperation, Mr. Weyand considered three alternatives. The first was to discount the price of the units in the hope that lower prices would lead to more sales. This did not work. The second was to sell the whole building for social housing to a non-profit social agency in Victoria. Two agencies looked at it seriously but lost interest because the location was too far from shopping. The third alternative was to bring over from Vancouver a marketing company which had previously been successful in selling similar units in Victoria. The Vancouver marketing company advised that there was simply no market for Blackberry's units at that particular time (January/February 2000).


[9]      The building needed tenants for maintenance reasons because it was full of moisture from the construction materials. It needed the ventilation which comes from opening and closing windows and doors and from the movement of people. Blackberry needed tenants for financial reasons because it had no revenues. In these circumstances, Mr. Weyand decided that his only option was to rent the 38 unsold units. He made the decision to rent in February 2000. Management of the rental operation of the Rainbow was assigned to Devon Properties Ltd. ("Devon") of Victoria. All of the 38 units were rented in a three-week period. Exhibit R-1 is a letter from Devon dated April 6, 2000 reporting for the month of March and enclosing a cheque for $16,500. Exhibit R-2 is a second letter from Devon dated May 5, 2000 reporting for April and enclosing a cheque for $26,700. Both of the letters from Devon were addressed to Mr. Weyand.


[10]    Mr. Weyand had retained a professional accounting firm to provide bookkeeping and accounting services to ACT and Blackberry. When Blackberry started to submit bookkeeping material which showed that rents were coming in, the accountants advised Mr. Weyand that GST was payable on what they called a "self supply". The accountants were referring to subsection 191(1) of the GST legislation which applies to a person who constructs a building and then rents all or part of it as a place of residence. Omitting many words which I regard as irrelevant for the purpose of this appeal, subsection 191(1) states:


191(1) For the purposes of this Part, where


(a)         the construction ... of a residential complex that is a single unit residential complex or a residential condominium unit is substantially completed,


(b)         the builder of the complex


(i)          gives possession of the complex to a particular person under a lease, licence or similar arrangement ... entered into for the purpose of its occupancy by an individual as a place of residence,


(ii)         ...


(iii)       ... and


(c)         the builder, the particular person or an individual who is a tenant or licensee of the particular person is the first individual to occupy the complex as a place of residence after substantial completion of the construction ... ,


the builder shall be deemed


(d)         to have made and received, at the later of the time the construction ... is substantially completed and the time possession of the complex is so given to the particular person ... , a taxable supply by way of sale of the complex, and


(e)         to have paid as a recipient and to have collected as a supplier, at the later of those times, tax in respect of the supply calculated on the fair market value of the complex at the later of those times.


[11]    The effect of subsection 191(1) is significant. If a person constructs a building with the intention of selling it and then, for whatever reason, grants possession of the building to a tenant under a lease as a place of residence, that person is deemed to have sold the building at the time when the tenant took possession and to have collected GST on the fair market value of the building at that time. Subsection 191(1) applied to Blackberry in March and April 2000 when the new tenants took possession of the 38 unsold units. Mr. Weyand had no knowledge of subsection 191(1) or its consequences until late April 2000 when the accountants advised him of Blackberry's deemed sale and deemed collection of GST based on the fair market value of the building.


[12]    Mr. Weyand immediately retained Palmer Appraisals Ltd. to advise with respect to the fair market value of the Rainbow at 799 Blackberry Road. Exhibit A-3 is the report of Palmer Appraisals Ltd. dated May 5, 2000 expressing the opinion that the fair market value of the Rainbow as at March 1, 2000 was $2,900,000. Mr. Weyand was shocked by the relatively low value determined by Palmer because the cost of the building alone (disregarding the cost of land) was approximately $3,400,000. The Palmer Report referred to the "Leaky Condo" syndrome and the prior sale of unit 401 at $190,000. Notwithstanding the sale price of that one unit, the Palmer Report fixed the value of one unit at $85,000.


[13]    In the hope that the Palmer Report (Exhibit A-3) was wrong, Mr. Weyand right away wanted a second opinion. He retained Top Ten Appraisals of Victoria to provide that second opinion. Exhibit A-4 is the report of Top Ten Appraisals dated May 29, 2000 expressing the opinion that the fair market value of the Rainbow as at May 26, 2000 was $3,118,000. The Top Ten Report estimated the value by sale price per unit at $79,300 which is only 6.7% less than the value ($85,000) determined by Palmer. Upon receiving the Top Ten Report, Mr. Weyand was resigned to the fact that the fair market value of the Rainbow (approximately $3,000,000) was significantly less than the amount owing ($5,265,000) by Blackberry to ACT on May 26, 2000. See Exhibit A-6.


[14]    The Palmer Report (Exhibit A-3) set a value of $2,900,000 as at March 1, 2000. The Top Ten Report (Exhibit A-4) set a value of $3,118,000 as at May 26, 2000. The 38 units were all rented in a three-week period in February and March according to page six of the Palmer Report. If I assume that the fair market value of the Rainbow was constant at $3,000,000 throughout the period when the tenants took possession of the 38 units, then Blackberry had a GST liability of $210,000 (7% of $3,000,000) as a consequence of subsection 191(1) of the Act. Mr. Weyand would have known of this liability around May 5 when he received the Palmer Report. In fact, he would have expected the GST liability to be greater because he thought that the value of the Rainbow was substantially higher than the amount ($2.9 million) appraised by Palmer. He stated that he was "shocked" at the low value of the Palmer appraisal.


[15]    Around May 22 or 23, 2000, Mr. Botten of Top Ten called Mr. Weyand to say that his (Botten's) second valuation was going to be a bit higher than the Palmer appraisal but in the same ballpark. By May 23, Mr. Weyand knew from two independent appraisals that the fair market value of the Rainbow was approximately $3,000,000 when Blackberry's debt to ACT was about $5,200,000. Mr. Weyand resigned as a director of Blackberry on May 24, 2000 and told his wife (the Appellant) that he was resigning. She knew that she was the only remaining director. When Mr. Weyand was asked in chief by Appellant's counsel what he had told the Appellant, he answered: