Commercial land developers: Use caution when registering rental buildings as condominiums, as GST/HST may apply: Cautionary tale of Carvest Properties Limited v. The King (2025 TCC 166)

When a Rental Building Registered as a Condominium Triggers the 191(1) vs. 191(3)

In Carvest Properties Limited v. The King (2025 TCC 166), the Tax Court of Canada addressed a recurring and financially significant issue in the GST/HST regime for residential developers: whether a newly constructed building should be classified as a series of “residential condominium units” under subsection 191(1) of the Excise Tax Act, or as a multiple unit residential complex (MURC) subject to subsection 191(3).

The distinction is not merely technical—it has significant financial implications. Although the case does not resolve the core question of whether subsection 191(1) or 191(3) applies to 315 Southdale, the property in question, it highlights several key considerations that developers and tax practitioners must carefully assess when structuring and reporting residential rental projects involving condominium registration.

The CRA reassessment in question concerned Carvest’s 169-unit residential building at 315 Southdale Road West in London, Ontario. Although the property operated solely as a rental apartment building, Carvest had registered it as a condominium under Ontario’s Condominium Act.

For GST/HST purposes, however, Carvest self-assessed the project under subsection 191(3), treating the building as a single MURC and remitting tax based on the fair market value of the entire complex. This approach was advantageous for Carvest: it involved a single self-supply, a significantly lower “en bloc” valuation compared to the combined value of individual condominium units, a single New Residential Rental Property Rebate, and a tax outcome aligned with Carvest’s claim—that the property was intended to be held and operated as a long-term rental rather than marketed for individual unit sales.

The CRA completely rejected that characterization. Based on the condominium registration and the Federal Court of Appeal’s prior decision involving Carvest’s 1985 Richmond Street project, the CRA argued that each unit became a “residential condominium unit” by law, activating subsection 191(1).

According to that provision, Carvest would need to self-assess GST/HST on each of the 169 units separately, using market comparables for condominium sales—a method that generally results in significantly higher total fair market values.

For example, the total FMV of individual condominium units under 191(1) may be around $84 million, compared to a hypothetical “en bloc” FMV of $50 million under 191(3). This would lead to considerably higher taxes payable, multiple New Residential Rental Property Rebates (NRRP), extensive valuation efforts, and much greater administrative complexity.

Aiming to resolve the issue early, the CRA filed a Rule 58 motion requesting that the Court determine, as a question of law, that subsection 191(1) applied. The Tax Court declined. The Court found that the motion was premature because a key factual issue remained unresolved: whether Carvest ever intended to sell any of the units as condominiums. That intention was directly relevant not only to the legal classification under subsection 191(1) versus 191(3), but also to the fair-market-value method that would ultimately determine the tax payable.

Without discovery, resolving the issue through Rule 58 could risk litigation “by ambush” (i.e., when one party is unfairly surprised at trial because key facts or evidence were never disclosed beforehand) and undermine the purpose of the discovery process.

The decision highlights the complexity of GST/HST self-supply rules, the financial stakes involved in the 191(1)-versus-191(3) distinction, and the limitations of using Rule 58 as a procedural shortcut in valuation-based tax disputes.

It also shows why developers should consult a Canadian tax lawyer expert when structuring rental or condominium projects, especially where condominium registration intersects with long-term rental use.

GST/HST Self-Supply in Residential Developments: A Practical Overview

The self-supply rules in the Excise Tax Act (“ETA”) govern how newly constructed residential properties are taxed when a builder begins renting those units rather than selling them.

Although Carvest Properties Limited v. The King (2025 TCC 166) does not resolve whether subsection 191(1) or 191(3) ultimately applies to the 315 Southdale project; the dispute arises directly out of this statutory mechanism. Understanding the framework is therefore essential to understanding the litigation.

Under the ETA, residential builders may claim GST input tax credits (ITCs) during construction. To ensure that GST/HST is applied at least once to the value created in a residential project—even where no sale to a third party occurs—the Act requires a “self-supply” when a newly constructed unit or complex is first occupied as a place of residence.

This deemed transaction, rather than an actual sale, is what triggers GST/HST. In Carvest, there is no dispute that a self-supply occurred when the 169 units at 315 Southdale began operating as rental apartments; the only dispute is which subsection governs the event.

Subsection 191(1) applies where a property constitutes a “residential condominium unit,” requiring a separate self-supply for each unit. Subsection 191(3), by contrast, applies to a “multiple unit residential complex” (MURC) and results in a single self-supply on the fair market value of the entire building.

This distinction is central in Carvest, where the CRA argues that condominium registration automatically engages subsection 191(1), while Carvest maintains that, as a rental building, the project falls under subsection 191(3).

The tax base for either provision is the fair market value (“FMV”) at the time of first occupancy. As reflected in the jurisprudence cited in Carvest—including Carvest’s earlier 1985 Richmond Street litigation—FMV under 191(1) is typically determined on a per-unit basis using condominium sale comparables, whereas FMV under 191(3) is generally calculated on an en bloc basis using income-based valuation appropriate for rental properties.

Although the 2025 decision does not make any findings about value, it is clear from the pleadings that the classification would materially affect the GST/HST payable.

The Tax Court declined to decide the issue under Rule 58 because a key factual question—whether Carvest ever intended to sell the units—remains unresolved. The judge held that this fact was material both to the legal analysis under 191(1) versus 191(3) and to the valuation methodology that would eventually need to be determined at trial.

Without discovery, resolving the issue at this stage would risk “litigation by ambush” (i.e., unfair surprise due to lack of pre-trial disclosure), contrary to the purpose of the discovery process.

Relevant FCA Guidance from Carvest’s Prior Litigation

Carvest’s earlier litigation before the Federal Court of Appeal — Carvest Properties Limited v. Canada, 2022 FCA 124 — provides important interpretive context.

In that decision, the Court confirmed that where a building is legally registered as a condominium, each suite becomes a “residential condominium unit” for purposes of subsection 191(1), regardless of whether the developer intends to operate the property as a long-term rental.

The FCA rejected Carvest’s argument that one should “first determine the value of the property and then decide which part of section 191 applies,” holding instead that the statutory classification must be determined first. Under subsection 191(1), the proper valuation unit is each individual condominium unit—valued using condominium-sale comparables—rather than an “en bloc” valuation of the building as a whole.

The Court also accepted a 6% absorption discount to reflect the market effect of selling 137 condo units over a compressed period. This FCA precedent is central to the CRA’s position in the 2025 Carvest litigation.

Procedural Outcome in Carvest: Why the Rule 58 Motion Was Dismissed

The outcome in Carvest Properties Limited v. The King (2025 TCC 166) is procedural rather than substantive.

The Tax Court did not determine whether subsection 191(1) or 191(3) applies to the 315 Southdale project. Instead, the Court dismissed the Canadian tax lawyer acting for the CRA’s attempt to obtain an early ruling under Rule 58 of the Tax Court of Canada Rules.

The CRA sought a determination that subsection 191(1) applied as a matter of law, arguing that the condominium registration alone was sufficient to classify each of the 169 units as a “residential condominium unit.”

Justice Rabinovitch refused to make such a determination at this preliminary stage. The Court found that the motion was premature because a material factual issue remained unresolved—namely, whether Carvest ever intended to market or sell any of the units as condominiums.

According to the Court, this factual question was deeply intertwined with:

• the proper legal characterization of the property under subsection 191(1) versus 191(3), and
• the valuation methodology that would ultimately determine the fair market value for the self-supply.

Justice Rabinovitch explained that deciding these issues without discovery risked “litigation by ambush” (i.e., unfair trial surprise due to the absence of pre-trial disclosure), contrary to the purpose and function of discovery in the Tax Court process.

The Court also referenced the broader line of Rule 58 jurisprudence—including Spencer, Kossow, McCartie, Matthew MacIsaac, and Paletta—which consistently cautions against using Rule 58 where factual disputes are inseparable from legal characterization.

As a result, the Rule 58 motion was dismissed, and the matter will proceed to complete discovery and trial. The decision leaves the underlying GST/HST classification unresolved but underscores the evidentiary and procedural limits of Rule 58 in tax disputes involving both legal characterization and valuation.

Pro Tax Tips – Practical Insights for Developers Navigating 191(1) and 191(3)

The Carvest litigation illustrates that GST/HST consequences in residential development turn on technical statutory classifications and factual documentation that are often misunderstood or overlooked.

To reduce risk and avoid costly reassessments, developers should consider the following practical measures:

• Exercise caution when registering rental buildings as condominiums. As highlighted by the Federal Court of Appeal in Carvest Properties Limited v. Canada, 2022 FCA 124, condominium registration may automatically trigger subsection 191(1), even where the developer has no intention of selling units. Before proceeding with condominium registration for administrative, financing, or municipal reasons, developers should obtain advice from a top Canadian tax lawyer to understand the potential GST/HST implications.
• Understand the valuation consequences of 191(1) versus 191(3). The CRA may insist on per-unit condominium-style valuations under subsection 191(1), which often produce a materially higher aggregate FMV than an “en bloc” valuation under subsection 191(3). Developers should work with experienced valuators and an expert Canadian tax lawyer to ensure the valuation methodology aligns with the project’s factual and legal characterization.

FAQ – Common Questions About GST/HST Self-Supply Rules for Residential Projects

Does registering a rental building as a condominium automatically trigger subsection 191(1)?

Not necessarily in all cases, but the Federal Court of Appeal’s decision in Carvest Properties Limited v. Canada, 2022 FCA 124, confirms that condominium registration is strong evidence that each suite is a “residential condominium unit.” The CRA frequently relies on this principle to apply subsection 191(1). Developers should consult an expert Canadian tax lawyer before registering the condominium to understand the tax implications.

Why does the classification between subsections 191(1) and 191(3) matter so much?

Because the fair market value base for GST/HST differs significantly, subsection 191(1) requires a separate self-supply for each residential condominium unit based on condominium-sale comparables, often resulting in a much higher aggregate FMV. Subsection 191(3) requires a single self-supply based on an “en bloc” valuation of the building as a rental complex. The difference can amount to millions of dollars in GST/HST.

Can project intent affect whether subsection 191(1) or 191(3) applies?

Yes. As the Tax Court noted in Carvest Properties Limited v. The King, 2025 TCC 166, the developer’s intention regarding unit sales can be a material factual issue. However, the FCA precedent demonstrates that legal form—particularly condominium registration—may carry significant weight. A top Canadian tax lawyer can help developers structure their documentation to reflect their actual business model.

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.