Beware the Tax Trap of GST/HST Deemed ‘Self-Supply’ Rules

Introduction – The GST/HST Deemed-Self-Supply Rules

The GST/HST deemed self-supply rules in Canada’s Excise Tax Act often trigger unanticipated GST/HST consequences for Canadian residential-real-estate developers. If a developer constructs or substantially renovates a residential property and then either rents it out or personally occupies it, the GST/HST deemed self-supply rules create a legal fiction, treating the developer as through the developer had sold the property to itself at fair market value. The developer must consequently remit the requisite amount of GST/HST to the Canada Revenue Agency.

The purpose of the GST/HST deemed-self-supply rules is to level the GST/HST outcomes between residential-real-estate developers and non-developers. A non-developer must pay GST/HST to buy a brand-new real property for investment or personal use. But residential-real-estate developers who register for GST/HST can claim input tax credits (ITCs) to recoup the GST/HST they pay on their building expenses. As a result, residential-real-estate developers could simply build their own investment or personal-use property, and if it weren’t for the GST/HST deemed-self-supply rules, the developer wouldn’t pay any GST/HST for the value added to the property.

In particular, the GST/HST deemed self-supply rules only apply to a “builder.” Canada’s Excise Tax Act defines a “builder” as a person who, in the course of a business or an adventure in the nature of trade, builds or renovates (or engages another to build or renovate) a property in which that person has an interest.

In other words, the GST/HST deemed-self-supply rules target only those who are in the property-development business. Only those who carry on a business can register for GST/HST, and only GST/HST registrants can claim ITCs, and only an expense relating to the GST/HST registrant’s business can qualify for an ITC. This is why the GST/HST deemed-self-supply rules don’t apply to property owners who either do not or cannot claim ITCs. The rules don’t apply, for example, to a dentist who has her vacation cottage completely rebuilt. The dentist cannot claim ITCs on the building expenses. (Still, the Canada Revenue Agency’s tax auditors will often incorrectly allege that these types of taxpayers fall under the legislative definition of “builder” and consequently assess additional GST liability based on the GST/HST deemed-self-supply rules.)

In addition, Canada’s Excise Tax Act contains three major exceptions to the GST/HST deemed-self-supply rules: (1) the personal-residence exception; (2) the student-residence exception; and (3) the communal-organizations exception. The Excise Tax Act also provides an election for employee or contractor housing at a remote-work site.

This article provides an overview of the GST/HST deemed-self-supply rules, the three exceptions, and the remote-work-site election. It then concludes by offering pro tax tips from our expert Canadian GST/HST tax lawyers.

The GST/HST Deemed-Self-Supply Rules: Subsection 191(1) of Canada’s Excise Tax Act

The basic GST/HST deemed-self-supply rules apply when a real-estate developer either personally occupies or rents out a residential property—i.e., a residential home, condo unit, or apartment building—after having built or substantially renovated that property. When triggered, the deemed-self-supply rule deems the real-estate developer to have sold and repurchased the property at its fair market value. As a result, when computing its net tax, the developer must include the GST/HST payable on the fair market value of the built or renovated property.

The GST/HST deemed-self-supply rules come in two forms. The first is the self-supply-by-way-of-lease rule; the second is the self-supply-by-way-of-personal-residence rule.

The self-supply-by-way-of-lease rule applies when a real-estate developer leases out the newly built or renovated property for use as another individual’s place of residence. As a result, the property developer must account for the GST/HST payable on the property’s fair market value. The fair market value is determined as of the time that the tenant enters the lease. If the newly built or renovated property happens to be an entire apartment building, the developer must account for the GST/HST payable when the first unit is rented out.

The self-supply-by-way-of-personal-residence rule applies when a real-estate developer occupies the newly built or renovated property for use as the developer’s own personal residence. As with the self-supply-by-way-of-lease rule, once the self-supply-by-way-of-personal-residence rule is triggered, the developer must account for the GST/HST payable on the property’s fair market value.

The self-supply-by-way-of-personal-residence rule comes with an important exemption: It doesn’t apply if the developer was the first to occupy the newly built or renovated property and if the developer didn’t claim any ITCs on the property. The following section discusses the personal-residence exception in more detail.)

Recall, GST/HST deemed-self-supply rules only apply to a “builder,” and the Excise Tax Act’s definition of “builder” excludes those who renovate or construct a property for a non-business purpose. So, if you aren’t in the property-development business and you hire a builder to substantially renovate your personal residence, the GST/HST deemed-self-supply rules are irrelevant to you.

The same is true if you purchase a newly built home as your personal residence. You’ll pay GST/HST upon purchase in the same way as any other consumer purchase. (You may be able to claim a GST/HST New Housing Rebate for a new-home purchase or a substantial renovation. For more information, read our article about the GST/HST New Housing Rebate.)

The Personal-Residence Exception: Subsection 191(5) of Canada’s Excise Tax Act

As discussed above, the GST/HST deemed-self-supply rules aim to level the playing field between real-estate developers, who could otherwise claim ITCs when constructing a new personal-use or rental property and thereby enjoy a tax advantage, and non-developers, who need to pay GST/HST when purchasing a new property from a builder.

Of course, the real-estate developer doesn’t enjoy this tax advantage if the developer hasn’t claimed any input tax credits in relation to the property. These cases don’t fit the rationale underlying the GST/HST deemed-self-supply rule. Indeed, the common feature among the rule’s three exceptions is that they apply when the property owner either did not or could not claim ITCs on the property’s purchase, renovation, or construction costs.

Subsection 191(5) of the Excise Tax Act ousts the self-supply rules if, after completing the construction, the real-property developer used the newly built or renovated property as his or her place of residence. The personal-residence exception also applies if the developer’s spouse, former spouse, or qualifying relative used the property as a place of residence after the developer completed construction.

The personal-residence exception applies only if all of the following three conditions have been met:

The property’s owner (e.g., the developer or builder) is a natural person.
The developer never claimed any input tax credits for acquiring or improving the property.
After its construction or renovation, the newly built or renovated property was used “primarily as a place of residence” of the developer, the developer’s spouse, the developer’s former spouse, or the developer’s qualifying relative.

In other words, if the real-estate developer is a corporation, or if the real-estate developer claimed ITCs on the property, or if the property was used for a purpose other than as the developer’s residence (or as the residence of a qualifying relative), the exception doesn’t apply, and the GST/HST deemed-self-supply rule remains in effect: The real-estate developer must therefore account for the GST/HST payable on the fair market value of the property.

The Student-Residence Exception: Subsection 191(6) of Canada’s Excise Tax Act

Subsection 191(6) of Canada’s Excise Tax Act overrides the GST/HST deemed-self-supply rule for qualifying educational institutions. In particular, subsection 191(6) exempts a university, public college, or school authority from the GST/HST deemed-self-supply rule if the institution builds or substantially renovates a residential property for student housing.

The GST/HST deemed-self-supply rule seeks to prevent real-estate developers and builders from gaining a tax advantage by claiming ITCs on personal-use or rental properties that they construct. If the builder couldn’t claim ITCs in the first place, there’d be no need for the self-supply rule.

This is precisely the sort of situation that the student-residence exception anticipates. Universities, public colleges, and school authorities cannot claim ITCs on the GST/HST costs they incur when constructing student housing. So, they have a specific carve out from the GST/HST deemed-self-supply rule.

The Communal-Organization Exception: Subsection 191(6.1) of Canada’s Excise Tax Act

Subsection 191(6.1) of Canada’s Excise Tax Act provides a similar exception as the student-residence exception under subsection 191(6), but it applies to communal organizations. Under the communal-organization exception in subsection 191(6.1), the GST/HST deemed-self-supply rule doesn’t apply if a communal organization (e.g., a religious community) builds or substantially renovates a residential property for the exclusive purpose of providing a place of residence for its members.

The communal-organization exception follows the same rationale as that underlying the student-residence exception. Communal organizations cannot claim input tax credits on the GST/HST costs incurred when constructing communal housing. So, they don’t enjoy the tax advantage that would otherwise benefit Canadian real-estate developers and builders. As a result, Canada’s Excise Tax Act exempts communal organizations from the deemed-self-supply rule.

The Remote-Work-Site Election: Subsection 191(7) of Canada’s Excise Tax Act

Subsection 191(7) of Canada’s Excise Tax Act provides an election allowing a GST-registered property developer or builder to defer the GST/HST resulting from the deemed-self-supply rule. The election is available only if a GST-registered real-estate developer or builder acquires, constructs, or renovates a residential property to house an employee or contractor at a remote-work site. Moreover, the qualifying real-estate developer or builder may claim ITCs for GST/HST costs incurred to maintain the remote-work residence during the time that the employee or contractor lives there.

Pro Tax Tips – The GST/HST Deemed-Self-Supply Rules & The Personal-Residence Exemption

The GST/HST deemed-self-supply rules trap many unsuspecting real-estate developers. If you’re a GST-registered real-estate developer who plans on building or rebuilding a personal home in your own name, don’t claim ITCs on your GST/HST costs; you may qualify for the personal-residence exemption and thereby avoid the tax bill from the GST/HST deemed-self-supply rule.

That said, the personal-residence exception has given rise to frequent tax litigation between Canadian real-property developers and the Canada Revenue Agency’s GST/HST auditors. One reason for this is that many CRA tax auditors misconstrue the exception’s legislative requirements. Contrary to what many CRA tax auditors seemingly believe, the personal-residence exception in subsection 191(5) doesn’t require that the home be used as a permanent residence, a primary residence, or a principal residence. Instead, the provision asks that the home be used “primarily as a place of residence” for the individual builder. “This means that an individual can benefit from the exception even if he has the secondary intention, at the time of [the property’s] construction, of reselling the property, provided he actually uses it as a place of residence after the construction is completed”: Coates v the Queen, 2011 TCC 74, at para 15. (Also see: Swift v The Queen, 2020 TCC 115). This means that, so long as the real-estate developer moves into the property when the construction is done and lives there, the developer may still qualify for the personal-residence exception—even if the developer intends to sell the property at a later date.

But our experienced Canadian tax lawyers have noticed that the Canada Revenue Agency often misinterprets the personal-residence exception and consequently charges GST/HST erroneously. In particular, the CRA’s GST/HST auditors tend to believe that, to qualify for the personal-use exception, a real-estate developer must reside in the property without any intention whatsoever of selling it later. This is incorrect. Recall, both the deemed-self-supply rule in subsection 191(1) and the personal-use exception in subsection 191(5) apply only to builders. And per the Excise Tax Act’s definition, a person is a “builder” only if that person’s property-development activities constitute a business or adventure in the nature of trade. As a result, subsection 191(1) and subsection 191(5) both take it as a given that, when constructing or rebuilding the property, the real-estate developer did so with a business purpose—such as selling it for a profit. In other words, the personal-residence exception anticipates that the developer residing in the property may intend to sell it for a profit later. The exception therefore “involves a simple factual determination” of whether the home was “actually… used first by the individual (who is a builder as defined) as a place of residence”: Coates, supra, at para 14.

If you’re a Canadian real-property developer wondering whether you qualify for the personal-residence exception, or if the CRA’s tax auditors claim that you don’t qualify for the personal-residence exception, consult one of our expert Canadian GST/HST lawyers today.

FREQUENTLY ASKED QUESTIONS

What is the GST/HST deemed-self-supply rule? What’s its purpose?

The GST/HST deemed-self-supply rules apply when a real-estate developer either personally occupies or rents out a residential property—i.e., a residential home, condo unit, or apartment building—after having built or substantially renovated that property. If a developer constructs or substantially renovates a residential property and then either rents it out or personally occupies it, the GST/HST deemed-self-supply rules create a legal fiction, treating the developer as through the developer had sold the property to itself at fair market value. The developer must consequently remit the requisite amount of GST/HST to the Canada Revenue Agency.

I’m a dentist. I recently hired contractors to tear down and rebuild my vacation cottage. Will I need to pay GST/HST because of the GST/HST deemed-self-supply rules?

No. The GST/HST deemed-self-supply rules only apply to a “builder,” which Canada’s Excise Tax Act defines a as a person who, in the course of a business or an adventure in the nature of trade, builds or renovates (or engages another to build or renovate) a property in which that person has an interest. In other words, the GST/HST deemed-self-supply rules target only those who are in the property-development business. The GST/HST deemed-self-supply rule seeks to prevent real-estate developers and builders from gaining a tax advantage by claiming ITCs on personal-use or rental properties that they construct. Only those who carry on a business can register for GST/HST, and only GST/HST registrants can claim ITCs, and only an expense relating to the GST/HST registrant’s business can qualify for an ITC. This is why the GST/HST deemed-self-supply rules don’t apply to property owners who either do not or cannot claim ITCs. As a dentist, you are not a “builder,” and you cannot claim ITCs on your building expenses. The rules therefore don’t apply to your vacation-cottage rebuild. Still, the Canada Revenue Agency’s tax auditors will often incorrectly allege that these types of taxpayers fall under the legislative definition of “builder” and cnsequently assess additional GST liability based on the GST/HST deemed-self-supply rules. If you find yourself in this position, our knowledgeable Canadian GST/HST lawyers can assist you with preparing a cogent, forceful, legally sound response to the CRA’s tax auditors. Schedule a consultation today.

I’m a real-estate developer who recently underwent a CRA GST/HST audit. The Canada Revenue Agency’s tax auditor said that I don’t qualify for the personal-residence exception and reassessed me for almost $1 million in GST/HST under the GST/HST deemed-self-supply rule. What should I do?

Consult one of our expert Canadian GST/HST lawyers today.

Our experienced Canadian GST/HST lawyers have noticed that the Canada Revenue Agency often misinterprets the personal-residence exception and consequently charges GST/HST erroneously. In particular, the CRA’s GST/HST auditors tend to believe that, to qualify for the personal-use exception, a real-estate developer must reside in the property without any intention whatsoever of selling it later. This is incorrect. Recall, both the deemed-self-supply rule in subsection 191(1) and the personal-use exception in subsection 191(5) apply only to builders. And per the Excise Tax Act’s definition, a person is a “builder” only if that person’s property-development activities constitute a business or adventure in the nature of trade. As a result, subsection 191(1) and subsection 191(5) both take it as a given that, when constructing or rebuilding the property, the real-estate developer did so with a business purpose—such as selling it for a profit. In other words, the personal-residence exception anticipates that the developer residing in the property may intend to sell it for a profit later.

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.