Introduction: Mr. Litman's Claim for The New Housing Tax Rebate
Litman v. The King was an appeal before the Tax Court of Canada (Tax Court) brought under informal procedure rules. The focus of the case was on subsection 256(2) of the Excise Tax Act (Tax Act), which sets out conditions that if met allows for a tax rebate to be claimed for new housing. Arlo Litman claimed this new housing rebate for a laneway house he built on his property in 2019. However, when the Canada Revenue Agency (CRA) assessed Mr. Litman, it denied his claim, which Mr. Litman objected against and then further challenged by bringing a Notice of Appeal to the Tax Court. The Tax Court sided with Mr. Litman and the tax assessment was referred to the CRA for reconsideration and reassessment.
Background: Mr. Litman's Laneway House
In 2016, Mr. Litman bought a property at 80 Huron Avenue North for $810,000, which included a house and detached garage. The house has four levels of approximately 1,000 square feet each.
In 2019, Mr. Litman built the laneway house measuring about 373 square feet on the pre-existing garage, which included a kitchen, bathroom, and laundry room. The garage itself was modified extensively to construct the laneway house but retained its key structural elements.
Mr. Litman's reason for building the laneway house was so that his mother-in-law could live close to her daughter and grandchildren, and age in place. The laneway house was thus never rented out or used commercially. His mother-in-law was the sole occupant and lived there continuously for a year before having to split time between the property and her condominium in Waterloo due to changes in the family's circumstances.
The Appellant testified about the construction and use of the laneway house. Rayeed Choudhury, the CRA appeals officer, provided background on the CRA's guidelines and the denial of the rebate but offered little relevant evidence.
Subsection 256(2): The New Housing Tax Rebate
Subsection 256(2) of the Tax Act outlines the conditions for the new housing tax rebate, which are as follows:
- Under paragraph 256(2)(a) the individual must have either constructed or substantially renovated a residential complex. This means that the individual must have engaged in significant building or renovation activities that resulted in the creation or improvement of a residential property.
- Additionally, under 256(2)(a) the residential complex must be used as the primary place of residence of the individual or a relation of the individual. This condition ensures that the rebate is targeted towards individuals who intend to occupy the property as their primary residence or for their family members.
- Under paragraph 256(2)(b) the fair market value (FMV) of the residential complex, at the time the construction or substantial renovation is completed, must be less than $450,000. This condition ensures that the rebate is targeted towards properties of a certain value range, typically to support affordable housing initiatives.
- Under paragraph 256(2)(c) the individual must have paid tax on the land that forms part of the residential complex or on any improvement thereto. This condition ensures that individuals who have fulfilled their tax obligations are eligible for the rebate.
The amount of the rebate is determined based on the FMV of the residential complex and is subject to gradual reduction as the FMV increases. Once the FMV exceeds a certain threshold, the rebate is completely eliminated.
Parties' Positions: Division on the Laneway House's Qualification as a New Residential Complex
Mr. Litman argued that the laneway house was a new residential complex, separate from the main house and garage. The CRA contended that the laneway house is not a new residential complex or a substantial renovation and that the whole property, including the main house and garage, should be considered a single unit.
Thus, the specific question raised between the two parties in the appeal was whether Mr. Litman had constructed or substantially renovated a residential complex for use as the primary residence of a family member, as required by paragraph 256(2)(a) of the Tax Act.
The Tax Court's Analysis: Meeting the Conditions of Subsection 256(2)
The Tax Court recognized that Canada is facing a housing crisis and that measures had been taken to address the issue, and Mr. Litman had argued that the tax rebate was one such measure. Nevertheless, the Tax Court found that, when determining the eligibility of a taxpayer to claim the new housing rebate, it had to abide by the restrictions and conditions contained in subsection 256(2) of the Tax Act. In doing so, the Tax Court adopted the view expressed in previous cases that the rebate is a limited and carefully tailored exception to the application of the Goods and Services Tax.
Turning to how those restrictions and conditions applied in this case, the Tax Court found that Mr. Litman must have either constructed or substantially renovated a residential complex that is a "single unit residential complex" when building the laneway house over a pre-existing garage. The Tax Court then went through a "somewhat circular" exercise to define a "single unit residential complex", which is defined in subsection 256(1) of the Tax Act to include "a multiple unit residential complex that does not contain more than two residential units". Whereas "a multiple unit residential complex" is defined in subsection 123(1) as "a residential complex that contains more than one residential unit, but does not include a condominium complex". A "residential unit" is found in subsection 123(1) and includes:
- a detached house,
- semi-detached house,
- condominium unit,
- mobile home,
- apartment or
- similar premises.
The Tax Court considered Mr. Litman's laneway house to be an apartment or similar premise. Thus, meeting the definition of a residential unit.
As the definition of a "single unit residential complex" shows, the rebate restricts the property to no more than two residential units. To determine this the Tax Court had to decide whether it was considering the whole property including the primary house and the laneway house or whether it was only considering the laneway house over the garage.
The Tax Court in deciding this issue examined the CRA's publication, Bulletin 0-92. The Tax Court recognized that while CRA publications are non-binding they can be an important fact to weigh in interpreting tax provisions. After reviewing Bulletin 0-92 the Tax Court found that if it followed the CRA's arguments, then the reason why the laneway house would not be eligible for the rebate was due to the fact it was built on the pre-existing garage. However, the Tax Court disagreed with the CRA's reasoning noting that the laneway is detached from the main house and should be considered as forming a new residential complex where there was none before.
Next, the Tax Court found that Mr. Litman's testimony was credible, and it was used to establish that his mother-in-law was the first and only occupant and she lived in the laneway house continuously for over a year. Thus, the Tax Court was satisfied that paragraphs 265(2)(a) and (d) were satisfied.
The Tax Court also examined paragraph 256(2)(c), which requires the individual to have paid tax on the land that forms part of the complex or on any improvement thereto. In doing so, the Tax Court noted that it was surprising that neither party submitted the full Form GST 191 that Mr. Litman submitted to the CRA. This GST 191 is the application form for claiming the rebate, which contains a chart where the individual applying provides information about the construction details and invoices, including the amount of GST paid. Nevertheless, the Tax Court found that 256(2)(c) was satisfied by the tax paid on the building materials, services, and fees associated with building the laneway house.
As for the condition under paragraph 256(2)(b), that the residential complex have a FMV of less than $450,000, the Tax Court sided with Mr. Litman's estimate. Mr. Litman estimated the FMV to be $355,607.90 by adding $100,000 to the cost of building the laneway house. The Tax Court highlighted that using costs was not an appropriate method for calculating FMV, as well as noting issues with how Mr. Litman arrived at $100,000. However, the CRA did not refute the amounts, and Mr. Litman had provided valuations of the entire property and a partial worksheet of construction costs. Based on this the Tax Court accepted his 'imperfect' calculation.
In the end, the Tax Court found that Mr. Litman met all the conditions set out in subsection 256(2) of the Tax Act. Thus, he had constructed (or engaged another person to construct) a residential complex and was entitled to the new housing rebate. The appeal was allowed, without costs, and the assessment was referred back to the CRA reconsideration and reassessment.
Pro-tax tips: Importance of Documentation and Proper Methodology
Two highlights of this case were the lack of a full Form GST 191 and the 'imperfect' calculations that Mr. Litman performed. For Mr. Litman, neither was fatal to his case, but in his case, the associated subsection 256(2) conditions were not major points of contention. Nevertheless, the Tax Court was highly critical of the fact that it was not provided Form GST 191 in its entirety, and the improper methodology used for calculating FMV. In other cases, being unable to properly defend how you completed Form GST 191 or calculated the FMV could be fatal to your claim. An expert Canadian tax law litigation lawyer would be able to advise on the proper methodology and documentation that should be used in defending a new housing tax rebate claim.
FAQs:
Would the renovations and building of the laneway house have qualified as a substantial renovation for the new housing tax rebate?
As an alternative to building a new house, the new housing rebate also allows substantial renovations to qualify for the housing rebate. This was an argument that Mr. Litman made in the alternative in his appeal. He argued that he had renovated the garage to an extent that qualified the laneway house as a substantially renovated residential complex. The Tax Court addressed the argument and noted that it would fail because there needed to be an existing residential complex. Thus, the garage needed to be a residential complex before the laneway house was built. As the Tax Court established when discussing the definition of a residential complex, there was no prior residential complex before the laneway house was built. This may however be the more appropriate argument to put forth in other circumstances. An expert Canadian tax lawyer would be able to advise you on whether you qualify for the new housing rebate, and, if needed, how the best argument to put forth in Tax Court to defend that you do qualify.
How can this case benefit other taxpayers?
This case sets a precedent that laneway houses can qualify for the new housing rebate, provided they meet the criteria under the Tax Act. It offers a roadmap for similar claims and highlights the importance of thorough documentation and credible testimony.