In a recent Tax Court of Canada case, the court had to determine whether a taxpayer was a general contractor or a project manager for the purposes of GST/HST collection.
A husband and his wife had purchased a home in Burlington, Ontario. The house was situated on a large lot in an upscale neighbourhood. When they purchased the home, the couple planned to tear it down and build a new custom-designed home on the lot. They paid approximately $650,000 for the land and building.
The husband then hired an architect to prepare detailed plans for his family’s new home. He also hired a person (the “taxpayer”) to supervise the home construction project.
The taxpayer was a foreign-trained engineer but was not licensed to practise in Canada. He had previously overseen the construction of his own family home in Oakville, Ontario, and had been referred by a family friend to the husband.
The husband was impressed with the quality of the taxpayer’s home. He was confident that the taxpayer could oversee the construction of his home. The husband therefore hired the taxpayer to assist him with the establishment of a budget, the hiring of qualified trades-people, the sourcing of all materials and supplies, supervision of the execution of the work over the planned construction period, and the interior design of the home.
For all of the taxpayer’s services, the husband agreed to pay him $150,000 payable in three equal instalments over the three–year construction period.
The husband and taxpayer entered into a written agreement for the project. The template they used had been found by searching on the Internet. The agreement was used to establish a budget for the project and set out the fee of $150,000, inclusive of GST/HST, for the specific services that were to be provided by the taxpayer.
Most of the work was not completed by the taxpayer personally; instead, he relied entirely on subcontractors.
The taxpayer reported the project management fees in each of his 2010, 2011 and 2012 taxation years.
However, when the Minister of National Revenue (the “Minister”) assessed the taxpayer’s net goods and services tax and harmonized sales tax (“GST/HST”) with respect to services supplied by him in connection with the construction of the home for 2010 to 2012, the Minister determined that the taxpayer should have collected GST/HST in the amount of $178,318.
The Minister had assessed the taxpayer on the grounds that he had acted as a general contractor, basing that assessment on the writtenagreement entered into between the taxpayer and the husband for the construction of the home. According to the Minister, the taxpayer agreed to construct the home for $1,550,000 inclusive of GST/HST.
The taxpayer disputed the Minister’s characterization of the arrangement. The taxpayer claimed that he acted solely as a construction project manager in connection with the home construction project and he was not required to collect GST on the fees charged to the husband because he qualified as a “small supplier” under the Excise Tax Act (“Act”).
The court had to determine the taxpayer’s role in providing construction services to the husband: Did he act as a project manager, potentially making him an agent of the taxpayer, or as a general contractor as determined by the Minister? And if he was a project manager, did that mean that the taxpayer was an agent of the homeowners?
Tax Court of Canada Decision
The court explained that agency specifically requires three elements:
(a) the principal’s control of the agent’s action,
(b) the consent of both the agent and the principal, and
(c) the authority of the agent to affect the principal’s legal position.
In cases where the two parties did not actually describe their relationship as an agency relationship and where there was no express appointment of one as the agent of the other, the principles of implied agency are as follows:
(a) In the absence of a written agreement, a court must closely examine the conduct of the parties to determine whether there was an implied intention to create an agency relationship.
(b) In reviewing the conduct of the alleged principal and the alleged agent, a key consideration is the determination of the level of control which the former exerted over the latter.
(c) The alleged principal’s control over the actions of the alleged agent may be manifested in the authority given by the former to the latter. In other words, the concepts of authority and control sometimes overlap.
In this case, the court found that the taxpayer did not agree to act as a general contractor. Instead, he acted as a project manager. In this capacity, he represented the husband when he hired, paid and supervised subcontractors on his behalf, as well as when he purchased materials used in the home construction project. In both cases, the taxpayer was reimbursed for these expenses by the husband. Therefore, the court found an implied agency relationship existed as the taxpayer acted as a conduit between the suppliers and the husband.
As a result, the court found that the taxpayer was a small supplier under s. 166 of the Act and was not obligated to register under the Act and collect GST/HST with respect to his project management fee.
Mark Feigenbaum brings together many years of litigation experience with a deep knowledge of tax law, corporate law, accounting, finance, and other related practice areas. Mark can help you avoid the biggest risks that may arise in tax disputes.
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