The Sale of Real Property is a Taxable Supply, Meaning GST/HST is Payable on Sale

Navigating the complexities of the Canadian tax system can be particularly challenging when dealing with real property transactions, especially in the realm of GST/HST obligations. For those involved in the buying, selling, or constructing of residential complexes, understanding the tax implications is crucial.

According to the Excise Tax Act (ETA), the supply of real property in Canada is generally taxable unless explicitly exempted. This introduces a vital aspect to consider for individuals who might find themselves classified as “builders” due to their involvement in renovating or building homes for resale or rental.

A supply of a residential complex by a builder is not an exempt supply, meaning the sale price of the house is subject to GST/HST. According to the ETA, an individual is a builder if he or she renovates a house (or hires another to renovate it) on land owned by the same individual for the purpose of selling or renting the house to somebody else.

A complete demolition and rebuild will meet the criteria for a substantial renovation as well. If one meets the criteria for a builder, there can be a hefty GST/HST bill to pay. The CRA devotes extensive resources to monitoring these types of real estate transactions as they can be very lucrative for the CRA since the GST/HST payable is based on the sale price of the home.

If the CRA has any reason to believe that one is a builder, they may assess or propose to assess the person as such, at which point the burden falls on the taxpayer to disprove the CRA’s assumptions.

Who Qualifies as a Builder?

A “builder” excludes “an individual” who acquired or substantially renovated a real property “otherwise than in the course of a business or an adventure or concern in the nature of trade.” Regarding the criteria for carrying on a business, the leading case on the topic is Happy Valley Farms Ltd. v. M.N.R.

Justice Rouleau, on p. 6, held that “Although profit from an isolated transaction may or may not be found to be taxable, a large number of similar transactions will generally lead to the conclusion that a taxpayer is carrying on a business. In addition, the length of time an asset is held is an indicative element, with the presumption being that the longer the taxpayer held on to the asset, the more likely it is to be in the nature of an investment.”

The criteria for determining whether an individual has carried on a business are the same as those that are relevant to the question of whether an individual has engaged in an adventure in the nature of trade, as listed below. However, a business person has an additional criterion of having “specialized knowledge” regarding the assets being dealt with.

When assessing whether the property was sold “in the course of a business or an adventure or concern in the nature of trade,” the courts generally consider multiple criteria speaking to an individual’s intention at the time of acquiring the home, including:

  • The nature of the property sold.
  • The length of period of ownership.
  • The frequency or number of other similar transactions by the taxpayer
  • The circumstances that were responsible for the sale of the property.
  • Motive.

The court considers all of these criteria holistically to determine if an individual had the intention of living in the property at the time of purchase, or if one intended to flip the property for a profit.

Personal-Use Exemption to the Self-Supply Rule and Exempt Supply Rule

Even if an individual was found to be a builder, one could still be exempt from paying GST/HST under the personal-use exemption to the self-supply rule and exempt-supply rule.

Under subsection 191(5) of the ETA, the self-supply rule under 191(1) does not apply if:

  • the builder is an individual;
  • at any time after the construction or renovation of the complex or addition is substantially completed, the complex is used primarily as a place of residence for the individual;
  • the complex is not used primarily for any other purpose between the time the construction or renovation is substantially completed and that time; and
  • the individual has not claimed an input tax credit in respect of the acquisition or an improvement of the complex.

This means that if a person actually occupied the dwelling after it was constructed or renovated, one will be exempt from paying GST/HST on the sale price. In order to prove occupancy there must be evidence that the taxpayer did actually occupy the property during the claimed period.

Evidence may include mail or deliveries to the property, utility bills, and geolocation apps showing the taxpayer at the property, among other things. This analysis can be complex in some cases, and it is advisable to consult with an expert Canadian tax lawyer if you have been reassessed as a builder to determine the strength of your claim and to draft a thorough response.

Pro Tax Tip: Plan Ahead to Ensure You Can Rebut a GST/HST Assessment

When planning renovations that could classify you as a “builder” under the Excise Tax Act, consider the scope and timing of your project from a tax perspective.

Start by documenting the project’s intent from the outset. If your plan isn’t to sell or rent the property, keep detailed records to support this. Also keep any records demonstrating that you actually occupied the property.

For those dealing in real estate, understanding the nuances of these taxes is crucial, particularly when it comes to the supply of residential complexes by builders, to avoid a nasty surprise GST/HST bill. If you believe you may qualify as a builder, it is advisable to consult with a top Canadian tax lawyer for advice on minimizing your tax bill and exposure to liability.

FAQ

What constitutes a “substantial renovation” for tax purposes?

The ETA defines substantial renovation in subsection 123(1) as renovating or altering a building to such an extent that all or substantially all of the building that existed before the renovation or alteration started, other than the foundation, external walls, interior supporting walls, floors, roof, and staircases were removed or replaced, and after finishing the renovation or alteration the building is a residential complex.

Can I claim input tax credits (ITCs) as a builder?

Yes, builders can claim ITCs for the GST/HST paid on expenses related to the construction or renovation of the property intended for sale or lease. Proper documentation is essential for these claims, so always keep receipts from contractors who charge GST/HST for their work.

 

Disclaimer: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.