Introduction: Rebuilding a Home and the Definition of “Builder” for GST/HST Purposes

Under the Excise Tax Act, when an individual purchases a newly built residential property the builder is required to collect and remit the GST/HST on the sale.  All things being equal, the purchaser will normally apply for a rebate on the GST/HST paid on the new housing, which is partially refunded if the application is approved.  This often comes as some surprise to first-time home buyers as the GST/HST does not apply on “used”, or previously inhabited, residential property.

At the same time, the Excise Tax Act  has provisions that require the GST/HST to be paid on properties that a taxpayer builds themselves, to make things equal for those that purchase on the open market.  In a typical example, a taxpayer purchases or lives in an older house and decides to tear down the house to rebuild a larger, more modern home to live in.  Once the property is either completely rebuilt, or “substantially renovated” it is considered a new home for GST/HST purposes.  The owner is deemed a “builder” under the Excise Tax Act and is deemed to have repurchased the new home at its fair-market value, and thus must self-assess GST/HST and remit it to the CRA once the construction is complete.

There are exceptions to this general rule, including the personal use by the builder of the newly built home, but the requirement to self-assess GST/HST is not well known by non-tax practitioners, accountants, contractors or real estate agents.  Accordingly, we often receive referrals from other lawyers, or have taxpayers reach out to us when presented with a CRA GST/HST reassessment in these circumstances.

In the following case study, we were approached by a client who had previously been represented by Canadian tax lawyer, who himself was not familiar with the GST/HST self-supply rules.  Had our Canadian tax law firm been retained originally, in similar cases in the past we have been able to achieve success without the need to appeal to the Tax Court. However by retaining our firm after an adverse tax assessment despite representation by the other Canadian tax lawyer, the client was able to save over $200,000 in GST/HST plus thousands in GST/HST litigation fees.  As we will describe below, our tax litigation strategy is always aimed at reducing costs where possible, without compromising on successful client tax results.

The Client’s File: An Assessment of $220,000 Against the Client’s Operating Company

Our client’s primary business was new home construction.  He lent his son the funds to purchase a new home, and the son acquired a property with the intention of doing a complete rebuild.  Once the property was acquired, the original house was torn down and slowly rebuilt by the client using his knowledge as a new home builder.  Eventually, the son moved into his new house and life went on.

A year or so later, the CRA audited the client’s corporation and, for some reason, determined that the corporation was the owner of the property.  On that basis, it assessed the corporation for approximately $220,000 on the self-supply of the newly built home.

The client sought advice from another Toronto tax law firm, who filed an objection with the CRA’s appeals division, arguing that the son was in fact the legal and beneficial owner of the property.  The appeals division performed a substandard legal analysis and concluded that if the property actually was owned by the son, the only effect would be shifting the $220,000 self-supply amount of GST/HST owing to the son personally.  The client’s original Toronto tax lawyer incorrectly agreed with this analysis and advised the taxpayer to abandon the tax objection. Therefore the tax assessment was confirmed, upholding a tax liability of $220,000.

The client was subsequently referred to our experienced Canadian tax lawyers by his real estate lawyer, whose clients we have helped with tax issues in the past, who believed that there must nevertheless be something that could be done to eliminate or reduce this tax debt.  We performed an in depth tax analysis and concluded that the property was owned solely by the son.  However, unlike the appeals division and the previous Toronto tax lawyer, we determined that the son was entitled to the self-supply exception at 191(5) of the Excise Tax Act; this subsection states that where a builder builds or substantially renovates a home, but subsequently makes it their primary residence, that the GST/HST on the new home is not applicable.  In essence, we determined that the total liability for both the son and the corporation was nil.

Our Strategy: An Aggressive Tax Litigation Stance

As soon as we determined that the actual liabilities were zero, we immediately appealed to the Tax Court of Canada on the corporation’s behalf.  We drafted and filed the tax pleadings setting out our position that the corporation had no legal or beneficial interest in the property whatsoever.  The CRA issued its reply, stating that it had not only assessed the corporation for the self-supply, but had also denied minor Input Tax Credits (“ITCs” which are in effect GST/HST paid) in the same reporting period that it attributed to the construction of the house, their position was the these were not eligible ITCs as the expenses were for the construction of a personal use property.  These expenses were small, only about $2,000 and so on that basis we determined that a strong settlement position was available to our client.

When our firm litigates, we always as a matter of course submit a formal written settlement offer to the Canadian tax lawyer acting for CRA as soon as possible in the process, as this protects our clients interests. Not only does a formal settlement offer put pressure on CRA’s tax lawyer to consider the merits of the appeal immediately, but it creates a significant risk for the CRA; if the case proceeds to trial and we are successful for our client, the CRA will be responsible to pay substantially our entire legal bill from the date the settlement offer was made.

In this case, it was not immediately apparent what type of settlement offer would be effective for costs – when a settlement offer is made in tax litigation, unlike in civil litigation, it must be “principled” meaning legally justifiable under the Excise Tax Act.  The conceptual problem originally was that we had a single issue appeal – namely the self-supply assessment of $220,000.  Once we discovered the nominal amount of denied ITCs, we were able to craft a principled settlement offer: in exchange for abandoning the claim for the $2,000 of ITCs, the CRA would abandon its $220,000 claim for the self-supply tax payable.

The Outcome: Success Based on Tax-Law Expertise & An Aggressive Settlement Approach with the CRA Tax Lawyer

Had we gone to trial in this case, we would have necessarily proven that the self-supply rule applied to our client’s son, and that the corporation was not the “builder” as defined in the act or even the owner at law.  This would have meant that virtually all of the legal fees paid by our client would be paid by CRA.  The CRA’s tax lawyer realized this after some discussions and submissions, based on our detailed and specific settlement offer and the CRA accepted the offer before the discoveries phase of the tax litigation even began.

In this case we were able to utilize our specialized knowledge of both the Excise Tax Act itself, as well as the rules of the Tax Court of Canada to back the CRA into a very expensive corner.  Dealing with the CRA’s tax lawyer with our expert tax knowledge meant that they quickly realized that our arguments were correct and that they had no choice but to accept our settlement offer.

All told, we were able to vacate a total of approximately $218,000 of assessed GST/HST at the earliest possible stage, saving our client potentially thousands in tax litigation fees.  This was a complete and flawless victory.

Tax Tips – Vicarious Income-Tax Liability & The Value of Consulting an Experienced Canadian Tax Lawyer

This file demonstrates the value of an early consultation with a Certified Specialist Canadian tax lawyer.  As we mentioned above, had we been retained originally, we believe that we would have settled the dispute without need to proceed to the Tax Court of Canada.  Had we been consulted any later, the entire $220,000 would have been lost.

If you want to dispute a notice of tax assessment or reassessment—including a GST/HST self-supply assessment —the Excise Tax Act requires that you file a notice of objection within 90 days from the date on the GST/HST assessment.   That provides plenty of time for tax guidance from our experienced Canadian tax lawyers provided you move quickly.

The Client’s case also shows why you shouldn’t assume that the CRA, or even lawyers who purport to practice tax law are correct; a second opinion when the stakes are high is more than worth the time and effort.

So, if you or someone related to you, including a corporation, has been assessed for the self-supply on a newly build or rebuilt residential home, speak with one of our experienced Canadian tax lawyers. We thoroughly understand this area of law, and we can ensure that your response to the Canada Revenue Agency is quick, efficient and as cost-effective as possible.