REAL ESTATE SOLICITOR S DUE DILIGENCE AND THE HST

Transcription

1 REAL ESTATE SOLICITOR S DUE DILIGENCE AND THE HST A solicitor is required to bring reasonable care, skill and knowledge to the performance of the professional service which he has undertaken. See Hett v. Pun Pong (1890), 18 S.C.R. 290 at page 292. In the book Canadian Tort Law (6 th Ed.) Butterworths, 1997 by Justice Allen M. Linden, the author states at page 147: A lawyer is obliged to act like a prudent solicitor. In other words, an attorney is liable if it is shown that the error or ignorance was such that the ordinary competent solicitor would not have made or shown it. The requisite standard of care, therefore, is that of a reasonable competent solicitor. A lawyer must bring to the exercise of his profession a reasonable amount of knowledge, skill and care in connection with the business of his client.... It may be both comforting and worrisome to learn that it is not necessary for a lawyer to know all the law applicable to the performance of a particular legal service, but there must be a sufficient knowledge of the fundamental issues or principles of law applicable to the particular work he has undertaken to enable him to perceive the need to ascertain the law on relevant points.... A lawyer s duty is not absolute, ascending into the realm of insurance against loss. It involves only careful, unnegligent advice on matters of law. The creation of an absolute standard for lawyers was wisely resisted so as to insulate the bar from too many crippling law suits..... Consequently, the ordinary care of an average solicitor in good standing suffices.... There is no liability for a mere error in judgment, because a solicitor does not undertake with his client not to make mistakes, but only not to make negligent mistakes. The determination is obviously a question of degree and there exists a borderland in which it is hard to distinguish between negligence and no negligence..... Liability is generally imposed when a solicitor fails to take some routine step any lawyer would realize is necessary.... The lawyer who follows the ordinary practices of the profession will be virtually immune from attack. 1

2 In the book Legal Opinions in Commercial Transactions (2 nd Ed. 1997), by Wilfred M. Estey, Butterworths, the author discussed the general rule with respect to a solicitor s duty of care. I refer you to Chapter 11, where Estey states: A solicitor owes a duty of care to his or her client both in contract and in tort. In contract, the terms of the retainer will be either express or implied and a solicitor has a duty to fulfill those terms in a careful, prudent manner. Similarly, in tort there is a sufficient relationship of proximity, or a special relationship, between the solicitor and his or her client, to give rise to a duty of care on Hedley Byrne principles. While the existence of a duty of care in favour of the client seems clear, the scope of that duty may not be. In this regard, the terms of the retainer are highly relevant. The recent practice of real estate agents sending the Agreement of Purchase and Sale to lawyers for their review, has, in my opinion, expanded the terms of the retainer given to lawyers by their real estate clients. For many years we were able to tell our clients that we wished they would forward their agreements to us for review. The current practice has now converted our wish into a reality. As a result, we must carefully consider the Agreement of Purchase and Sale our clients have signed. Misunderstanding in respect to the HST Clause could cause significant financial loss to a client. It is my practice in representing purchasers on a new construction Agreement of Purchase and Sale to ask them if they are sure they qualify for the HST Rebate they have agreed to assign to the Builder. It is important to ensure that the purchasers realize that should they not qualify for the Rebate, the builder will be looking for payment equal to the Rebate amount. Many of my clients do not understand the concept of the HST Rebate and how its assignment to the Builder causes the purchase price to be higher than it first appears. If your client does not qualify for the Rebate, and that Rebate is assigned to the Builder, the Builder is going to come back to your client looking for reimbursement for that portion of the purchase price which remains unpaid. Two sample cases where a purchaser did not qualify for the HST Rebate are described in two cases which 2

3 are annexed to this paper. I refer you to the cases of Berube v. R [2000] GSTC 54 (only the head note and case commentary are attached) and Davidson v. R [2000] G.S.T.C. 25. In Berube, the taxpayer built a second home with the alleged intention that it would eventually become the family s primary residence. The new home was built near a lake. The 17 year old son of Mr. Berube, lived in the second property. But the Court held that the new home was more of a cottage or recreational property. You can not have two primary residences and the Court held that the taxpayer did not provide sufficient evidence of his intention of making the second home his primary residence. The taxpayer s application for a rebate of HST paid for the second house, was denied. In Davidson, the applicant for the rebate didn t qualify because title had been taken in his name and a second person s name. The second person was named as an owner for the purpose of obtaining financing for the purchase. However, the second owner had her own separate residence. The addition of the second owner, who did not reside in the premises, was fatal to the application for the HST rebate. A third case I wish to bring to your attention is Boucher v. R [2000] G.S.T.C. 84. This was a case where the homeowner was successful in arguing that the HST Rebate should be allowed. I have attached the head note and the Editorial Comment. This case was one in which there was an intention to move to the second home in a different city. But when the Wife was unable to find employment in the new city, the family decided to keep the first house and sell the new one. The Court believed the parties did intend to move to the new home and sell the old one. Therefore, the home owner did qualify for the rebate on the purchase of the new home. We have been receiving new style Agreements of Purchase and Sale. You have no doubt noticed that Agreements of Purchase and Sale written on behalf of Builders, now contain indemnities by which the purchaser agrees to forthwith pay an amount equal to the HST Rebate to the Builder, if for some reason the purchaser does not qualify for the Rebate. It is important to explain to the Purchaser, the obligation he is undertaking, by executing the Agreement of Purchase and Sale. I find that most clients purchasing new 3

4 home construction, do not really understand the way the purchase price has been calculated. Also, the Nova Scotia Real Estate Board has created a new style Agreement of Purchase and Sale. You will note that the new form agreement contains a place where the real estate agent is to check off a section of the Agreement noting whether the real estate transaction does or does not attract HST. Please pay close attention to this new method of dealing with the HST. On several occasions, Agreements of Purchase and Sale have arrived in my office with the whole clause struck out. I have taken the position that to strike out this clause is to make the Agreement silent as to the HST. I do not know what other practitioners feel about the practice of striking out the clause. I believe we need to clarify as a common practice, how we are to react to Agreements with the HST clause struck out. My research indicates that if an Agreement of Purchase and Sale is silent as to HST, then HST is in addition to the purchase price. (See Carman v. Jackson [1999] G.S.T.C. 24 and B and B Music Ltd. v. Thompson River Music [1999] G.S.T.C. 87 and Leong v. Princess Investments Ltd. [1999] G.S.T.C 86.) It should be our practice to call our clients, whether they be vendors or purchasers, to discuss with them their knowledge of the nature of the property being sold and its past use. Whether you are representing the Vendor or the Purchaser, you need to insure that the client understands what the HST clause and HST tax consequences mean to him. Real Estate agents are becoming more cautious in the drafting of Agreements of Purchase and Sale. We are seeing situations now where the real estate agents are asking questions about the HST when the listing is made with the Vendor. We cannot always rely on the fact that the real estate agent has already reviewed the HST issue with the Vendor. Remember, when reviewing the Agreement of Purchase and Sale, it is the Buyer s agent who is writing the offer. The Buyer s agent may not have the same knowledge as the Sellers agent. Therefore, the Agreement of Purchase and Sale may not be worded to deal with the HST properly. Perhaps the real estate transactions to be most concerned about are the ones where the two parties make their own private arrangement. One party, usually the purchaser, comes to you to formally write up the contract. Sometimes the Vendors and Purchasers have not even considered the issue of HST. These 4

5 transactions are the ones with potential HST problems. What happens when CCRA assesses the Vendor and finds that the HST should have been collected by the Vendor from the Purchaser? I refer you to Carman v. Jackson [1999] G.S.T.C. 24 and B and B Music Ltd. v. Thompson River Music [1999] G.S.T.C. 87 and Leong v. Princess Investments Ltd. [1999] G.S.T.C 86. These cases outline procedures successfully used by Vendors to collect the HST in Agreements of Purchase and Sale which were silent as to HST. The cases seem to indicate that if an a Agreement of Purchase and Sale is silent as to HST, then HST, if attracted by the sale, is in addition to the purchase price. Keep this in mind when an Agreement of Purchase and Sale arrives in your office with the HST clause struck out or marked DELETE. Agreements of Purchase and Sale for raw land can cause concern. In particular, I an referring to the concept of the two lot rule. In many instances you must complete your title search before you can conclude that the Vendor has subdivided his property into more than two lots. The search may reveal that the transfer of the lot to your client, is the sale of the third or subsequent lot. As you read the title search you may want to review again the Agreement of Purchase and Sale to recall what the clients agreed to in the Agreement of Purchase and Sale. You may discover that the parties thought that there would be no HST attracted. You now know your client is purchasing the third lot and HST is attracted. Depending on what the Agreement of Purchase and Sale stipulates, one of the parties to the Agreement is going to be quite upset about the outcome. Two interesting questions can arise when a sale of raw land takes place. They are: 1. Is HST attracted if the first lots were sold prior to the creation of HST in 1991; and 2. Is HST attracted if the first two lots were sold prior to the implementation of the two lot rule. These questions have been considered in two different cases with two different outcomes. I refer you to R. v. Arsenault [2000] G.S.T.C. 88 and Rive v. Newton [2001] G.S.T.C 85. The Case Summaries found 5

6 at the end of each case indicate, in the opinion of the editor of the case series, that HST will be attracted, no matter how many years ago the first lots were transferred. 6

7 As counsel for a Vendor Developer selling a property to an HST Registrant purchaser builder, it is important to obtain a Statutory Declaration from the Builder in respect to the Builders intention and agreement to self remit the HST. Recently a very good precedent for this document came in to my office. I have received permission to include the precedent in this paper and it can be found at the end of my paper as an appendix. The last case I refer to you is humorous but will hopefully cause you to pause and think when you read or draft the HST clause in an Agreement of Purchase and Sale. I refer you to Dhir v. R [2002] G.S.T.C 107. In this case Justice T.C. Teskey, in an oral decision, gave his decision and advice to Mr. Dhir. Mr. Dhir was a new immigrant to Canada. Mr. Dhir had worked on two or three different properties, did improvements, subdivided one of the properties and then sold the properties for a profit. Mr. Dhir was found to have be conducting a business or an adventure in nature of trade. Mr. Dhir argued that as a new immigrant he did not know about or understand the law in respect to HST. Justice Teskey stated: They were taxable supplies, sir. You have been caught. I give you the benefit that you did not know about it, but that is because you did not choose the right people to get the right advice from. But there is nothing I can do for you. You do have a problem with the English language. Our country is rich because of people like you and it is getting richer every day, but if you do have a problem, then go and hire the right people that you trust and that will give you good solid advice, people that if they do not give you good advice, you can turn around and sue them for the bad advice. Now, you go to a little bookkeeper around the corner, you are going to get what you pay for. Go to a nice firm, all the initials, and when they are wrong, you sue them, and that is the advantage of dealing with upright people that are in business, whether they are engineers, surveyors, accountants, lawyers, doctors. You will not think of going to the gal next door to have your appendix out because it is sore. No. You would go to the hospital and have one of the doctors take it out. And if the doctor takes off your right leg instead of your appendix, what have you got? You have got an action against them. That is the advantage of dealing with the right type of people. In conclusion, it is respectfully submitted that our implied retainer as real estate lawyers, has expanded. Our clients expect that we will inform them of the meaning of whatever HST Clause is found in their Agreement of Purchase and Sale. Further, I believe our clients expect that we will notify them of a change

8 in the initial interpretation of that clause if the title search reveals something other than what was anticipated to be the HST situation. In preparation for the writing of this paper, I contacted CCRA and in particular, Mr. Steve Momberquette. Mr. Momberquette advised me that CCRA is ready willing and able to provide advice to us. A special phone number is available to accountants and legal counsel who wish to ask technical questions. That number is Mr. Momberquette also advised that very good information is available from the CCRA Web Site., which is There is a GST/HST Memorandum Series In particular, you may wish to refer to Chapter 19. IN THE MATTER OF: - and - The sale of Lot 1234, Halifax Regional Municipality Subdivision, Nova Scotia from Land Developer Limited to Building Contractor Limited IN THE MATTER OF: The Excise Tax Act, R.S.C. 1985, C.E.-15 as amended STATUTORY DECLARATION and say as follows: I, John Smith, of the Halifax Regional Municipality, and Province of Nova Scotia make oath 1. That I am the President of Building Contractor Limited (the Company ) a body corporate, incorporated under the Laws of the Province of Nova Scotia and as such have personal knowledge of the matters herein declared to, unless stated to be based upon knowledge and belief. 2. That the Company is the purchaser of Lot 1234 from Land Developer Limited, vendor. 3. THAT the Company agrees to purchase and the vendor agrees to sell the property known as Lot 1234.

9 4. THAT the Company is registered pursuant to subdivision (d) of Division V of Part IX of the Excise Tax Act, its registration number is. 5. THAT the purchase of the property by the Company and its sale by Land Developer Limited does not involve the supply of a residential complex to an individual. 6. THAT the Company has undertaken to remit any Harmonized Sales Tax which may arise in respect to the conveyance of the property pursuant to the Agreement directly to the Receiver- General, pursuant to subsection 228 (4) of the Excise Tax Act. 7. THAT I am making this declaration and delivering it to the Vendor with the intent and understanding that it will be relied upon by the Vendor, and that the Vendor will, on the basis of such reliance, decline pursuant to subsection 221(2) of the Excise Tax Act to collect any Harmonized Sales Tax which may aries in respect of the conveyance of the property pursuant to the Agreement. 8. THAT for the purposes of this Statutory Declaration, the term residential complex shall have the same meaning as given to that term for the purpose of the Excise Tax Act. AND I MAKE THIS SOLEMN DECLARATION conscientiously believing it to be true, and knowing it is of the same force and effect as if made under oath and by virtue of the Canada Evidence Act. DECLARED before me, at Bedford, ) in the County of Halifax, and ) Province of Nova Scotia, this ) day of, 2003 ) ) John Smith ) ) )

10 A Barrister of the Supreme ) Court of Nova Scotia ) CERTIFICATE AND INDEMNIFICATION I, John Smith, President of Building Contractor Limited, hereby certify that: 1. The Company is the purchaser and Land Developer Limited is the vendor of the lands situate at Lot 1234, Halifax Regional Municipality Subdivision, Nova Scotia, (the property ). 2. The Company is registered pursuant to the provisions of the Excise Tax Act of Canada (the Act ) including subsection (d) of Division V of Par IX thereof, its registration number being 3. The Company acknowledges that as purchaser of the aforesaid lands at Halifax Regional Municipality Subdivision, Nova Scotia, it is responsible for the payment of any taxes which are eligible under the Excise Tax Act and to that end undertakes to file the appropriate return pursuant to the provisions of the Excise Tax Act. 4. The Company further acknowledges that this Certificate and the Indemnification is being delivered to Land Developer Limited with the intent and understanding that it will be relied upon by Land Developer Limited and that Land Developer Limited will, on the basis of such reliance, decline pursuant to subsection 221(2) of the Act to collect any Goods and Services Tax which may arise in respect of the conveyance of the Property pursuant to the Agreement. 5. The Company hereby indemnifies and holds harmless Land Developer Limited from the payment of any taxes eligible under the Act as a result of the aforesaid purchase. DATED at Bedford, Nova Scotia, this day of, 2003 Witness BUILDING CONTRACTOR LIMITED Per: John Smith

11 BIOGRAPHY: Janet Nolan Conrad is a graduate of Dalhousie Law School, the class of She is an associate at the law firm, Blackburn English. Janet works from the Bedford office. Janet is a general practitioner.