Apr 23rd, 2019
Taxes Included or Excluded? The $120,548.75 GST/QST Question
Jan 25th, 2019
By Paul Déry-Goldberg
Jan 25th, 2019
By Paul Déry-Goldberg
If a contract makes no mention of whether taxes are included or excluded, who pays the GST/QST?
There is very little caselaw in the Province of Quebec with regard to this issue, either because the parties usually clearly state whether taxes are included or excluded or that the amounts involved are not worth the expense a lawsuit.
The issue was however recently the object of a Superior Court judgment rendered by the Hon. Donald Bisson, S.C.J. (Reid v. Lauber 2015, QCCS 5105) and that was confirmed by the Court of Appeal (Lauber v. Reid, 2016 QCCA 1587).
In this case, the consequences to the parties having signed a contract that made no mention as to whether the taxes were included or excluded were devastating: the Plaintiff, Lynda Reid, suffered a loss of $120,548.75 for the GST/QST that she was required to pay and the Defendant, Eleanor Lauber was forced to file for bankruptcy.
Here are the relevant facts.
In August 2012, Ms. Lauber a.k.a. Bunny Berke, an experienced real estate agent, owned a home in Westmount that needed sprucing up. She knew that her home would sell for significantly more if she could renovate it; unfortunately, Ms. Lauber was short on funds and the property was heavily mortgaged.
Ms. Lauber had witnessed at open-houses the beautiful transformations of Ms. Reid’s own homes. Ms. Lauber therefore approached Ms. Reid to see if she was interested in renovating her home in exchange for a fee that would depend on its eventual selling price.
Ms. Reid agreed to Ms. Lauber’ proposal and asked her lawyers to prepare a contract. Ms. Reid’s lawyers advised her that, in order to protect the property while she was doing the renovations, it would be in her best interests to refinance Ms. Berke and take a first ranking hypothec.
The contract prepared by Ms. Reid’s lawyers made no mention of GST/QST.
The renovations went forward as planned and Ms. Lauber sold her home for $2,295,000. Pursuant to the Agreement, Ms. Reid was therefore owed $805,000 for the renovation work.
Ms. Lauber asked Ms. Reid to send her an invoice to be paid at closing. As Ms. Reid had only ever renovated her own homes, she spoke to her accountant who advised her that she had to charge GST/QST in the amount of $120,548.75 because the services that she had rendered were a “taxable supply” under the law, even though the contract makes no mention of GST/QST. In fact, the issue of GST/QST had simply never been raised or discussed before between the parties or their legal counsel.
At closing, Ms. Lauber contested the fact that she owed Ms. Reid GST/QST for the renovation work and the parties were at a standstill before the notary. Without having the relevant tax expertise, the notary could not determine whether GST/QST was payable as the contract made no mention as to whether taxes are included or excluded.
Ms. Reid could not wait until the courts adjudicated the matter before being paid the $925,548.75 that she was owed. The parties therefore agreed to instruct the notary to disburse the $805,000 clearly owing to Ms. Reid pursuant to the contract and to have the court settle the issue of the GST/QST. Unfortunately for Ms. Reid, she was required to pay the GST/QST to the tax authorities.
The Court was therefore required to decide two (2) main issues: 1) does the Agreement create an obligation for Ms. Lauber to pay GST/QST to Ms. Reid? and 2) in the affirmative, was the GST/QST included in the price of the contract?
The case was heard by the Hon. Donald Bisson, S.C.J., and at trial, Ms. Lauber’s attorneys did not argue that taxes were included in the amount owing to Ms. Reid. Ms. Lauber’s attorneys did however attempt to qualify the contract as being either a partnership agreement or an agreement to render financial services, therefore no GST/QST would be payable.
In his judgment, Bisson, J. decided that the contract was not a partnership agreement or a contract to render financial services, but rather that the contract, titled “Agreement of Loan and Renovation”, was a two-part agreement for a loan and renovation services.
Ms. Lauber was therefore ordered to pay damages to Ms. Reid in the amount of $120,548.75, plus interest and costs.
Once Ms. Lauber’s appeal was dismissed and the Superior Court judgment was final, Ms. Berke filed for personal bankruptcy, stating in her bankruptcy documents that the cause of her bankruptcy was the amount owing to Ms. Reid pursuant to the judgment.
Adding insult to injury, once the judgment was final, the lawyers that prepared the contract for Ms. Reid sued her for their legal fees for drafting the contract, arguing that, in the end, the Courts decided that the GST/QST was owed by Ms. Lauber therefore their contract was adequate, if not clear. Ms. Reid contested owing any amounts to her former attorney and counter-claimed on the basis that their failure to draft a clear contract created the impasse at closing. The claim from Ms. Reid’s previous counsel was dismissed and Ms. Reid was awarded a nominal amount on her cross-claim for the inconvenience suffered (see Phillips Friedman Kotler v. Reid, 2018 QCCQ 611).
This publication is of a general nature, is as of the date indicated and is not intended to constitute an opinion or legal advice. The facts and circumstances of your particular situation should be specifically identified and addressed before appropriate legal advice may be given.