Surrey City Centre Mall Ltd. v. The Queen

Surrey City Centre Mall Ltd. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2012-10-02
Neutral citation
2012 TCC 346
File numbers
2009-3904(GST)G
Judges and Taxing Officers
Joe E. Hershfield
Subjects
Part IX of the Excise Tax Act (GST)
Decision Content
Docket: 2009-3904(GST)G
BETWEEN:
SURREY CITY CENTRE MALL LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on January 17, 18 and 19, 2012 at Vancouver, British Columbia
Before: The Honourable Justice J.E. Hershfield
Appearances:
Counsel for the Appellant:
Joel A. Nitikman
Jessica Fabbro
Counsel for the Respondent:
Ron D.F. Wilhelm
Bruce Senkpiel
____________________________________________________________________
JUDGMENT
The appeal from the assessment made under the Excise Tax Act, for the reporting period from July 1, 2002 to July 31, 2002, is allowed, with costs, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with and for the reasons set out in the attached Reasons for Judgment.
Signed at Ottawa, Canada this 2nd day of October 2012.
"J.E. Hershfield"
Hershfield J.
Citation: 2012 TCC 346
Date: 20121002
Docket: 2009-3904(GST)G
BETWEEN:
SURREY CITY CENTRE MALL LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Hershfield J.
Background
[1] The Appellant (Mall Co) has appealed an assessment for GST (the “Appeal”) made under subsection 182(1) of the Excise Tax Act (the “Act”).
[2] At all relevant times, Mall Co was a wholly owned subsidiary of ICBC Properties Ltd. (“IPL”) which, at all relevant times, was a wholly owned subsidiary of The Insurance Corporation of British Columbia (“ICBC”)[1] which is a provincial Crown Corporation operating a mandatory scheme of motor vehicle insurance in British Columbia. IPL, or its subsidiaries, managed all of ICBC’s real estate investments.
[3] At all relevant times, Mall Co and ICBC were both registrants for the purposes of Part IX of the Act.
[4] A series of transactions led to Mall Co acquiring lands in Surrey, British Columbia in 1999 and 2000. These lands were intended to be used for the development of a mall and university space for the Technical University of British Columbia (“Tech BC”) created by an enactment of the legislature of the Province of British Columbia (the “Province”) to own and operate a new university in Surrey.
[5] To document the respective undertakings of the parties, a series of agreements were entered into amongst them. Each of these agreements will be discussed under the next heading. They include a Development Agreement which was entered into among Mall Co, ICBC, Tech BC and the Province as represented by the Minister of Advanced Education Training and Technology (the “Authorized Ministry”) in 2000 whereby, in general terms, the Appellant agreed to develop and construct a mall and the university space. Under that agreement, Mall Co agreed to lease the university space to Tech BC and Tech BC agreed to lease the space from Mall Co. ICBC agreed to fund Mall Co’s obligations under the agreement to complete the university space.
[6] The development proceeded. ICBC advanced funds to IPL which in turn advanced such funds to Mall Co in respect of the project. However, in 2002, the Province closed Tech BC and announced that it would not fulfill its obligations to lease the university space.[2]
[7] After negotiations between ICBC and the Province, a Settlement Agreement was entered into among ICBC, Mall Co, IPL, Tech BC and the Province, as represented by the Authorized Ministry. Under the Settlement Agreement, Tech BC agreed on behalf of itself and the Province to pay to ICBC or its nominee $41.1MM (the “Payment”) in exchange for ICBC, IPL and Mall Co releasing Tech BC and the Province from all obligations under the Development Agreement and related agreements.[3]
[8] The Payment was made but there is no agreement between the parties to the Appeal as to whom the Payment was intended to be made or benefit or on whose behalf it was received although it is not in dispute that the Payment was directed to and received in the bank account of ICBC. It is also not in dispute that after ICBC received the Payment, Mall Co’s books showed a reduction in its liability to IPL in the amount of $41.1MM.
[9] In December 2005, the Minister of National Revenue (the “Minister”) assessed ICBC for GST in respect of the Payment under subsection 182(1) of the Act. That provision would be applicable if ICBC received the Payment for the termination of an agreement to make a taxable supply. The taxable supply said to have been agreed to was a lease. ICBC was asserted to be the supplier of the lease right. Subsection 225(1) of the Act calculated the net tax payable based on the amount received by ICBC. In the alternative, the Minister pleaded that Mall Co was the party that made the taxable supply but that ICBC was still liable for the net tax under subsection 225(1) as the recipient of the payment on behalf of Mall Co. ICBC appealed, pleading, inter alia, that Mall Co was the party under the Development Agreement that made the supply and that ICBC incurred no liability under subsection 182(1).
[10] The Minister consented to judgment in favour of ICBC and proceeded with the assessment now under appeal on the basis that Mall Co was the party that made the taxable supply and received the Payment. The assessment against Mall Co relates to the period from July 1, 2002 to July 31, 2002 and is for $2,405,055.67 plus penalties and interest.
[11] The Appeal launched by Mall Co now denies liability under subsection 182(1).
Further Background and Particulars of the Agreements and Related Documents
[12] Background documentation establishes that in 1998 ICBC, in an effort to diversify its investments, decided to invest in real estate. It became aware of an opportunity to become the lead developer in a major project integrating Tech BC with office and retail space in Surrey, British Columbia. ICBC made all the preparatory plans to purchase the requisite lands and develop and finance the project with fixed targets for its development profit and return on funds invested. Research and analysis was undertaken by planners and financial advisors retained by ICBC. There is no doubt that from the outset Tech BC, as the promised anchor tenant, was a critical player in this entire project. However, as noted throughout these Reasons, while that “promise” was made by both the Province and Tech BC, the promise ultimately relied on was that of the Province.
[13] In September of 1999, ICBC, Tech BC and the Province, as represented by the Authorized Ministry, executed a Memorandum of Understanding (“MOU”) that underlined the significant contributions of ICBC and Tech BC and the Province including ICBC’s proposed significant financial investment in the project. While the MOU anticipated the chain of subsidiary corporations that unfolded to carry out the ownership, development and operation of the project, the financing responsibility imposed on ICBC and the mutual reliance that all the parties to the MOU placed on each other is very evident.
[14] Although the pleadings suggest that the MOU is not a legally binding agreement,[4] it sets the project out in considerable detail. The entire project to be developed by ICBC had several components and more than one phase. In the first phase Tech BC was to lease 425,000 square feet of space designed and built for it and ICBC was to develop up to 250,000 square feet for its own use. As I understand it, the first phase also included the redevelopment of the existing adjacent Surrey Place Mall that ICBC had acquired (the “Surrey Mall”). The redevelopment of the Surrey Mall was to include the development of neighboring parcels that were to be assigned by Tech BC to the project on a partnership basis. The redevelopment of the Surrey Mall was conditional on agreements being reached with three major retailers whose tenancies were critical to the success of that part of the project.[5]
[15] It is also evident from the MOU, that the base rent Tech BC was required to pay to the corporation in the chain of ICBC subsidiaries that was to become the legal owner of the subject property (which turned out to be Mall Co), was fixed by a formula. That formula depended on two numbers: the “base building budget” and the “lease rate”. The lease rate itself was set out in the MOU as an effective annual interest rate of 7%. The base building budget was said to be set out in an appendix. Although the appendix was not in evidence, I accept the Appellant’s witness’s testimony that the base building budget was “basically” frozen at $82.9MM at the time of entering into the MOU. The MOU formulates the base rent at $7MM payable at the commencement of the lease plus: the base building budget amount less $21MM[6] amortized at the lease rate over the 25 year term of the lease payable monthly on the first of each month from commencement of the lease.
[16] The base building budget was essentially a turnkey development cost amount requiring ICBC to be responsible for cost overruns subject to very limited exceptions where adjustments specified in the MOU were to be allowed. For example, the base building budget could change by adjusting for final construction financing costs and for cost increases resulting from delays, or change orders, caused by or required by Tech BC.
[17] In March 2000, three agreements were entered into, all effective on the same day in March of that year. The first agreement, the Mutual Objectives and Endowment Agreement (the “MOEA”) was entered into by Mall Co, the Province, as represented by the Authorized Ministry, and Tech BC. It committed the Province and Tech BC to assign to Mall Co certain of the requisite lands that Tech BC had a right to acquire from the City of Surrey to Mall Co. These endowment lands were referred to as the Surrey Lands and would earn Tech BC an endowment payment of $1.625MM (being 50% of the stipulated phase one development profit) plus a 50% interest in the profit earned from the development of additional endowment parcels.[7] The MOEA also confirms Tech BC making a further substantial contribution to the project by becoming a major tenant.
[18] The MOEA sets out in some detail future development plans for the Surrey Lands. In very general terms these plans provide for the development of contiguous parcels for the benefit of the parties and include Tech BC having a right to acquire back a parcel of land for $1 for the construction of further university space.
[19] The MOEA clearly commits Mall Co to the development of the initial space for Tech BC and has a binding arbitration provision.
[20] Mall Co’s commitment to the development of initial space for Tech BC as provided for in the MOEA is said to be pursuant to the Tech BC Lease as contemplated in the Development Agreement. The Development Agreement is the second of the three agreements signed in March, 2000.
[21] The parties to the Development Agreement were Mall Co, ICBC, Tech BC and the Province as represented by the Authorized Ministry. The Development Agreement details the construction terms for the initial Tech BC space and confirms the turnkey base building budget with limiting adjustments not dissimilar from those set out in the MOU. Details of completion, turn over and the lease commencement date of the Tech BC space are set out. The base rent is set out by the same formula set out in the MOU. There is provision for a lease inducement payment[8] of $700,000 payable on delivery of certain completion certificates. The Development Agreement has a binding arbitration clause. As a party to this agreement, ICBC has the right to seek arbitration on any dispute under the agreement. That would appear to include a dispute relating to the lease which would not be extraordinary since as the party financing the project it has an interest in the lease.
[22] As well, the Development Agreement has specific provisions pertaining to ICBC’s covenants:
Agreements related to Current Project
4.1 ICBC Mall Co. and ICBC agree that they will not directly or indirectly sell a majority position in, or relinquish control of management of, the Current Project until such time as it is substantially complete but, subject to the foregoing, ICBC Mall Co. and ICBC shall not be precluded from:
(a) obtaining financing on the Current Project, so long as the other terms of this Agreement and the Surrey Lands Agreement are complied with; or
(b) entering into joint ventures or other similar agreements with another party or parties in respect of all or parts of the Current Project provided that ICBC Mall Co. and ICBC shall each remain fully responsible for its respective obligations under this Agreement.
Agreements of ICBC
4.2 ICBC agrees, whether or not any of the matters referred to in §4.1 have occurred, to fund:
(a) to completion ICBC Mall Co.’s obligations to complete the Initial University Space;
(b) any payments required pursuant to the Surrey Lands Agreement in respect of the completion of Development Goal #1 and Development Goal #2; and
(c) any repayment or return of the Security Deposit required under the TechBC Leases(s), including the drawdown of the Security Deposit commencing in the twentieth year of the Term.
[23] Further, as a party to the Development Agreement, there are many other provisions of that agreement that impose obligations on ICBC. For example, paragraph 3.6 which sets out the base rent calculations (the full text of which is appended to these Reasons as Appendix A) includes a sentence that the parties have contemplated the gross buildable area for Tech BC’s rental space would be approximately 425,000 square feet and under one of the provisions dealing with design change orders, namely paragraph 2.7, ICBC, not Mall Co, is included in the obligation to meet and identify promptly changes in design plans. As well, paragraph 3.8 provides:
Lease Delivery Agreement
3.8 The parties agree that they will enter into the Lease Delivery Agreement attaching the settled form of the TechBC Lease and providing:
(a) instructions to complete certain blanks in the form with information as it becomes available;
(b) providing how certain information or amounts will be obtained or calculated;
(c) providing for how any dispute as to the completion of the blanks or the calculation of any amount will be resolved.
[24] The form of lease referred to in the Development Agreement is attached to that agreement and consists of 56 pages of lease terms. However, the basic terms set out in the first 4 pages are replete with blank spaces that are required to be filled in. The Lease Delivery Agreement provides details for determining various essential terms of the lease and filling in the blank spaces in the form of a lease attached to the Development Agreement.
[25] The Lease Delivery Agreement, in addition to being an attachment to the Development Agreement, exists as a stand alone document and is the third agreement executed in March 2000. The parties to that agreement were Mall Co and Tech BC. The Lease Delivery Agreement has a binding arbitration provision which provides as follows:
(a) If there is any dispute as to the completion of any part of the Lease pursuant to this Agreement, the dispute shall be resolved by arbitration as contemplated in the Development Agreement but the terms of the Lease shall continue to apply. If the dispute involves a monetary matter, the Tenant will pay the amount specified. [Emphasis added.]
(b) Pending resolution of any dispute in respect of the Lease Form, the Tenant will occupy the Leased Premises on the terms and conditions (including the payment of Rent) specified by the Landlord and, upon receipt of a final decision of any arbitration or agreement by the parties, the parties will make such adjustments as may be required including, if applicable, the payment of interest at the Default Interest Rate on adjusted amounts.
(c) In completing the Lease Form, all square bracketed provisions or instructions will be deleted.
(d) The parties agree to act reasonable, diligently and in good faith to resolve, at the appropriate time, all documentation called for herein or to agree upon or settle any dispute or difference with regard to completion of the Lease Form.
[26] This was the state of the agreements when the construction of the project commenced. According to the Appellant’s witness, the construction of the building, designed to accommodate Tech BC’s specific needs, was about half complete in February of 2002 when the Province announced that Tech BC would no longer operate a university and would not fulfill its obligation to enter into the subject lease. Correspondence from ICBC, signed by the President and CEO, in May 2002 to the Deputy Minister of Finance of the Province of British Columbia confirms that in February of 2002 the Government decided that Tech BC would not occupy the subject space. The correspondence refers to ICBC’s proposed settlement where the Government would pay ICBC $41.1MM for ICBC to release Tech BC and the Crown from their obligations. Reference is made to the lease between Tech BC and ICBC’s subsidiary as well as to incurred or committed costs in respect of which there was no commensurate value or opportunity for mitigation. In spite of a noted likely write down of the property, the letter reflects an agreement for ICBC to refund monies if it later recovers its costs on a present value basis after expenses, and further, after a full refund, ICBC would split any further amount on a 50/50 basis. A commitment letter from the Government accepting these terms was said to have been furnished to ICBC.
[27] On July 16, 2002, ICBC, Mall Co, Tech BC, IPL and the Province, as represented by the Authorized Ministry entered into a Settlement Agreement under which Tech BC agreed to pay $41.1MM, on behalf of itself and the Province, to ICBC. The endowment payment made to Tech BC in the amount of $1.625MM was not required to be repaid. In exchange, ICBC, IPL and Mall Co released Tech BC and the Province from all of their obligations under the March 2000 agreements and all related agreements (i.e. indemnification from lawsuits from other tenants of Surrey Mall).
[28] The Settlement Agreement recital acknowledges that all the parties to the agreement had participated in a series of agreements relating to the acquisition and development of lands in the City of Surrey. The agreement is clearly a definitive settlement of all agreements, entitlements and obligations of all parties under these various agreements. Tech BC and the Province gave up all of their interest in all phases of the project excepting reserving some leased space to be assigned to Simon Fraser University. ICBC undertakes to take financial responsibility for the obligations of both the ICBC subsidiaries.
[29] The Settlement Agreement consists of 5 Parts. Reproduced below are Parts 2, 3, 4 and two paragraphs of Part 5.
PART 2
PAYMENT OBLIGATIONS
2.1 Tech BC does hereby, for itself, and for and on behalf of the Province, agree to pay ICBC, or to its nominee, the Settlement Monies, on the execution of this Agreement.
2.2. The parties acknowledge and agree that the respective agreements and obligations of the parties described in the Agreement are conditional upon the payment by Tech BC to ICBC of the Settlement Monies and that the respective entitlements and obligations described herein will not be effected or effective until that payment is made.
PART 3
SURRENDERED ENTITLEMENTS
3.1 Tech BC and the Province do hereby quit claim and surrender unto the ICBC Companies all of their respective, right, title and interest in and to participation in any manner in the development and utilization of any part of the Central City Development;
3.2 Despite the generality of the foregoing, Tech BC does hereby surrender and release to ICBC Mall Co. all of its right, title and interest under the Mutual Objectives and Endowment Agreement;
3.3 Despite the generality of § 3.1, the Province and Tech BC do hereby surrender and release to the ICBC Companies all of the entitlements and benefits respectively accruing to them or either of them under or pursuant to the Tech BC Agreements;
3.4 Notwithstanding any of the other terms of this Agreement, nothing in this Agreement affects in any way the leases identified in Schedule “A” made between Tech BC and ICBC Mall Co. for space in the Central City Development, which leases are being assigned by Tech BC to Simon Fraser University.
PART 4
RELEASES AND INDEMNIFICATIONS
4.1 The ICBC Companies accept the surrender by the Province and by Tech BC of all of their respective participation interests in and to the Tech BC Agreements and in and to the Central City Development and the ICBC Companies acknowledge that the participation of the Province and of Tech BC in the Central City Development is cancelled and that all of the respective obligations imposed upon the Province and upon Tech BC by the Tech BC Agreements are at an end and of no further force or effect;
4.2 By their execution of this Agreement, the ICBC Companies fully release and discharge the Province and Tech BC from all liability for the losses, damages, costs and expenses suffered by the ICBC Companies as a result of the cancellation of the participation of the Province and of Tech BC in the Central City Development;
4.3 The ICBC Companies further release the Province and Tech BC, and each of the them, from any requirements for further participation in the Tech BC Agreements and from any of the obligations imposed upon the Province and Tech BC therein;
4.4 The ICBC Companies do hereby agree to indemnify and save harmless the Province and Tech BC from and against all claims and causes of action that may arise against the Province and Tech BC as a result of the cancellation by the Province and Tech BC of their respective participations in the Central City Development, brought by:
a) the City of Surrey,
b) tenants or prospective tenants at the Central City Development, or
c) any other parties who have suffered damages as a result of the determination that the Central City Development will not be occupied by either Tech BC or by the ICBC Companies to the extent that those parties had originally intended to occupy the development;
provided however that the ICBC Companies will not indemnify the Province and Tech BC with respect to any claims or causes of action arising out of:
d) agreements or commitments made by the Province or Tech BC with parties other than the City of Surrey, including, without limitation, agreements with suppliers or construction contractors regarding construction, fit-up, servicing, or furnishing of the Tech BC premises at the Central City Development, or
e) the operations or proposed operations of Tech BC as an educational institution, including claims brought by employees, unions, professional organizations, students or prospective students.
4.5 Despite the generality of the foregoing sub-paragraphs, the ICBC Companies acknowledge that neither the Province nor Tech BC has any obligation or responsibility to repay to the ICBC Companies any part of the Initial Endowment Payment;
4.6 ICBC does hereby specifically undertake financial responsibility for the obligations of the ICBC Companies described herein, and agrees that if any one of the ICBC Companies is called upon to pay pursuant to the indemnity agreement provided herein, and is for any reason unable to do so, then ICBC will make such payments as would have been paid by such other of the ICBC Companies but for such inability.
4.7 The Province and Tech BC acknowledge and agree that all of the respective obligations to the Province and Tech BC imposed upon the ICBC Companies by the Tech BC Agreements are at an end and of no further force or effect.
4.8 The Province and Tech BC release the ICBC Companies, and each of them, from any requirements for further participation in the Tech BC Agreements and from any of the obligations to the Province and Tech BC imposed upon the ICBC Companies therein.
PART 5
GENERAL PROVISIONS
5.1 It is the intention of this Agreement to provide a full and complete mutual release of the parties respective obligations under the Tech BC Agreements;
5.2 The payment by the Province of the Settlement Monies is intended to fully release and discharge the Province and Tech BC from all further participation in and liability for the Tech BC Agreements and the Central City Development;
[30] The Settlement Agreement did not refer to GST.
[31] As noted above, initially, ICBC was assessed for the deemed GST portion of the Payment pursuant to subsection 182(1) of the Act. A Consent Judgment was issued in favour of ICBC and a corresponding assessment was issued against the Appellant.
Appellant’s Submissions
[32] The Appellant submits that the Development Agreement was an invalid “agreement to agree”. The basis for this submission is that at its core is an appended form of lease which never came into existence – that is, there was never an actual lease in force. The Appellant argues that the Development Agreement did not set out the rent to be paid. The formulistic stipulations to calculate the rent were subject to future specified, but unknown, adjustments and “such other amount as may be agreed to between Tech BC and Mall Co.”[9] Many authorities are cited for the rule that the amount of rent is an essential term of a valid lease agreement. The Minister never assumed that the rent was agreed upon.
[33] As a separate but related argument, the Appellant submits that if the Development Agreement is a valid agreement, there is still no “supply”. The assumed supply is the lease. However, it is a future lease and a future lease is not a supply. That section 133 provides that entering into any agreement to supply property is an immediate supply of property, does not include an as yet unfinalized appended form of lease.
[34] The Appellant further submits that if the Court finds that the Development Agreement was a valid agreement, then subsection 182(1) still does not apply as the party that breached the agreement, Tech BC, was the relevant supplier and not the recipient. The Appellant claims that Tech BC supplied Mall Co with the right to force Mall Co to enter into the lease and be the anchor tenant for the proposed mall. Thus, the Payment was made by the intended supplier under the Development Agreement. The charging provision does not apply if the payment is made by the supplier.[10]
[35] As well, the Appellant submits that the Payment was not “paid” to Mall Co but was paid to ICBC and that the word “paid” must mean “actually paid”. Subsection 182(1) is not concerned with the reasoning behind the registrant getting paid, only who is getting paid. The Appellant points to overwhelming evidence that the Payment was actually paid to ICBC not Mall Co. The Appellant relies on an asserted Crown concession that ICBC did not receive the Payment as agent or trustee for Mall Co and asserts that the legal obligation here was solely to pay the Payment to ICBC not Mall Co. Any money that later flowed down to Mall Co from ICBC for the construction of the mall were separate transactions.
[36] The Appellant also submits that section 17 of the Technical University of British Columbia Act (“Tech BC Act”) provides that: “The university is not liable to taxation except to the extent the government is liable.” It is argued that this provision means that if the Province of British Columbia would not be liable for tax under section 165 of the Act as the recipient of the supply, then Tech BC is similarly not liable. The Appellant points out that, pursuant to paragraph 122(b) of the Act and section 125 of the Constitution Act, the Province would not have to pay taxes as a recipient of a supply.
[37] Lastly, in response to the Respondent’s reliance on Mall Co having had its debt to IPL reduced “as a consequence” of the Payment, the Appellant relies on Dieni v. The Queen.[11] The Appellant asserts that the causal connection between the debt reduction and the Payment is not strong enough to meet the requirement imposed by subsection 182(1).
Respondent’s Submissions
[38] The Respondent submits that the conditions for subsection 182(1) to apply are all present in this case.
[39] The Respondent submits that while Tech BC might have made the Payment to ICBC, as a result of doing so, Mall Co owed $41.1MM less to IPL. Beyond the suggestion that there was a constructive receipt of the Payment by Mall Co given Mall Co’s entitlement, indirect benefit received and acquiescence as where the Payment would go, a broad construction of the language of the subject provision is advocated to catch all payments made, and all reductions in the debts of the registrant occasioned, as a consequence of the termination of an agreement for the making of a taxable supply. The language of the provision does not require that the recipient of the supply be the person making the payment to the registrant supplier. Similarly, the language of the provision does not require that debt reduced be a debt owed to the intended recipient of the supply. Such a wide scope for the application of the subject provision should thereby import an intention to include a payment to a third party where that payment reduces a debt of the registered supplier. Further, it is noted that where the intended recipient of the supply is not the person making the payment to the registrant supplier, the intended recipient of the supply gets the input tax credit (“ITC”). Similarly, where the debt reduced is not a debt owed to the intended recipient of the supply, the intended recipient of the supply gets the ITC.[12] The integrity of the system requires that the party who gets the ITC should be seen as the payor and that the payee be seen as the registered supplier. Otherwise, there would be no tax to offset the ITC. Further, the purpose of subsection 182(1) would be defeated if a registrant could avoid it by allowing a termination payment to be directed to a related party or creditor while, nonetheless, getting its financial benefit.
[40] The Payment was an economic substitute for the rent that should have been paid.[13] A common sense appreciation of all the surrounding circumstances in this case point to the Payment having been intended to replace a rent obligation, an obligation that all relevant agreements imposed on Tech BC to pay to the lessor, Mall Co.[14] As evidenced by settlement correspondence, all parties recognized and acknowledged that Payment was to compensate for Tech BC’s failure to enter into the lease and meet its obligations to Mall Co. As such the Payment must be taxed accordingly. That is the clear intent of the subject provision and that intention must be given effect. In support of this contention, the Respondent submits that Mall Co was incorporated to own and operate the mall on its own account and that the fundamental obligations under the agreements were between Tech BC and Mall Co. That obligation was to pay rent. The other parties’ obligations were merely ancillary. Putting a slightly different slant on this argument, it is submitted that on acceptance of Tech BC’s repudiation of the lease, Mall Co had a claim for compensatory damages relating to costs incurred for the special tenancy needs of Tech BC, the resultant costs of refitting the building and lost profit. The Payment extinguished Mall Co’s right to compensatory damages and benefited Mall Co by reducing its upstream debt obligations.
[41] Furthermore, the Respondent posits that ICBC had no legal claim to the Payment and, therefore, suffered no direct loss. Any loss suffered was predicated on the lost value in the mall or of its assets. ICBC acted on Mall Co’s behalf in respect of its involvement in the settlement. It received no net benefit from the Payment. Where it directed the Payment to be made cannot be determinative of the issue. Paying ICBC discharged its obligation to Mall Co and that is sufficient to satisfy the “paid” requirement in subsection 182(1). In interpreting “paid” in this way is consistent with the Parliament’s intention.
[42] The Respondent submits that Mall Co’s supply of a right to a lease was a taxable supply. A right to a lease is “property”. The lease itself is not property but is the manner of providing property. The right to a lease is admitted to arise only where its essential material terms have been agreed upon. However, it is argued that all such terms were sufficiently certain to bind the parties and where there could be a difference of opinion on a few points, recourse to arbitration would resolve them. Mall Co and Tech BC intended to enter into a binding lease agreement and conducted themselves accordingly.
[43] While acknowledging that the Payment was made as a consequence of terminating the various agreements, it is maintained that the parties negotiated it to compensate for Tech BC terminating its obligation to lease the subject space from Mall Co. On the other hand, it is also submitted that the Payment was made as compensation for the termination of Tech BC’s right to use the subject space.
[44] In response to the Appellant’s submission that Tech BC was the supplier, the Respondent submits that this argument is irrelevant. In response to the Appellant’s submission that the Payment is clothed by a Crown immunity, the Respondent submits that Tech BC made the Payment on its own account and that the Government of British Columbia owed no compensation to ICBC or Mall Co in respect of the termination of the lease obligation. The Crown immunity from taxation does not protect Tech BC unless it made the Payment on behalf of the Province as its agent. Tech BC was neither a Crown agency nor any other type of agent of the Province. Any agency argument would have to be supported by express language in its empowering statute and/or clear evidence of the Province’s control over the agent’s mandate and operations. Neither have been established in the case at bar.
[45] The Respondent submits, overall, that Mall Co is responsible to remit the taxes deemed to have been collected on the Payment as per the formula in subsection 182(1). The Respondent requests that the appeal be dismissed, with costs.
Evidentiary Issue
[46] In its pleadings the Appellant admitted that under the Development Agreement Tech BC agreed to pay it a monthly rent of $426,630. The Respondent admitted that statement in its pleadings.[15] The Respondent objected at the hearing to the Appellant’s attempt at arguing, on the basis of evidence presented at the hearing, that there was no fixed monthly rent agreed to at the time the Development Agreement and the Lease Delivery Agreement were signed with the appended form of lease. The admission is said to be binding and that it dispenses the need for proof of it. Allowing a withdrawal of that admission would result in a radical change in the nature of the issue in controversy and not only be contrary to the Rules of the Court[16] and common law but would be an abuse of process as well.
[47] No notice was given of the Appellant’s intention to make an issue of whether the rent had been fixed and it did not seek an order to withdraw its admission or amend its pleading. The Respondent submits that the lateness of the change in the factual admissions and the prejudice it causes demand a finding that the admission must stand. The prejudice is irreparable having lost the chance to more fully explore the matter in discoveries and bring contextual evidence of the understandings of the various parties.
[48] The Appellant asserts that there has been no admission of the rent actually being fixed but rather there was only a reiteration of the references to the monthly rent amount in the subject agreements that was subject to change and not fixed and that, in any event, whether the rent was sufficiently fixed to constitute a binding term of an agreement, versus warranting a finding that there was only an agreement to agree, is a question of law in respect of which no admission can be made. The Respondent answers that even if the rent is a question of law, the pleadings did not make an issue of it.
[49] The Appellant further submits that prior proceedings made the Respondent alive to the issue and that it was canvassed by the Respondent on cross examination of the Appellant’s witness at the hearing of the instant appeal. The Respondent answers that the prior proceedings demonstrate, by contrast in the pleadings, that what was at issue there was not an issue here and that the cross examination of the Appellant’s witness neither opened the issue nor afforded a sufficient opportunity to address the issue raised only in argument.
[50] The various authorities relied on the by the Appellant were distinguished by the Respondent.[17]
Statutory Provisions
[51] Subsection 182(1) of the Act provides:
Forfeiture, extinguished debt, etc.
182. (1) For the purposes of this Part, where at any time, as a consequence of the breach, modification or termination after 1990 of an agreement for the making of a taxable supply (other than a zero-rated supply) of property or a service in Canada by a registrant to a person, an amount is paid or forfeited to the registrant otherwise than as consideration for the supply, or a debt or other obligation of the registrant is reduced or extinguished without payment on account of the debt or obligation,
(a) the person is deemed to have paid, at that time, an amount of consideration for the supply equal to the amount determined by the formula
(A/B) × C
where
A is 100%,
B is
(i) if tax under subsection 165(2) was payable in respect of the supply, the total of 100%, the rate set out in subsection 165(1) and the tax rate for the participating province in which the supply was made, and
(ii) in any other case, the total of 100% and the rate set out in subsection 165(1), and
C is the amount paid, forfeited or extinguished, or by which the debt or obligation was reduced, as the case may be; and
(b) the registrant is deemed to have collected, and the person is deemed to have paid, at that time, all tax in respect of the supply that is calculated on that consideration, which is deemed to be equal to
(i) where tax under subsection 165(2) was payable in respect of the supply, the total of the tax under that subsection and under subsection 165(1) calculated on that consideration, and
(ii) in any other case, tax under subsection 165(1) calculated on that consideration.
[52] In short then, when a registrant agrees to make a taxable supply to a person and as a consequence of the breach, modification or cancellation of that agreement an amount is paid to the registrant other than as consideration for the supply, the person is deemed to have paid consideration for the supply that includes GST and the registrant is deemed to have collected such tax amount in respect of the supply and must remit it. The assessment seeks to uphold that remittance obligation on Mall Co on the basis that it agreed to make a taxable supply to Tech BC and as a consequence of Tech BC reneging on its commitment under that agreement, a GST included payment is deemed to have been made to Mall Co.
Analysis
Refining the Issues
[53] While I have organized my analysis of the several issues in this Appeal under the separate headings set out below, it will be helpful to put two issues in this Appeal in context, namely the existence of an enforceable lease and the recipient of the Payment.
[54] It is clear that the parties agree that the taxable supply at issue is the lease. While my analysis will respect that consensus, it will also reveal that the Payment may be seen as having been made in respect of a different service that ICBC provided to the Province. In