Overview – Why GST/HST Can Apply to a Newly Built Home Sale

In Fadali v The King, 2026 TCC 86, the Tax Court of Canada considered a practical question that can arise in many residential real estate projects: when does a taxpayer who builds and sells a new home become a “builder” for GST/HST purposes?

The answer matters. If a taxpayer is a builder under the Excise Tax Act, the sale of a newly constructed residential property may be taxable. The seller may be required to collect and remit GST/HST, even if the seller is an individual and even if the property was originally described as a personal or family project.

In Fadali, the taxpayer was found to be a builder of a newly constructed home at 5B Carluke Crescent in Toronto. The Tax Court held that the sale was taxable and that the taxpayer was required to collect and remit $509,071 in GST/HST. The Court also held that the taxpayer could not claim input tax credits because he was not a GST/HST registrant when the construction-related GST/HST became payable. His potential recovery was instead through the section 257 rebate mechanism for non-registrants. The taxpayer succeeded only on a limited penalty issue: the late-filing penalty had to be recalculated to reflect the rebate amount allowed by the CRA.

The broader lesson is important for taxpayers involved in severances, infill development, renovations, new builds, or quick sales of newly constructed homes. A taxpayer may believe that a project is personal because the original plan was to live in the home or use it for family purposes. But the CRA and the Court will look at the objective evidence. They will consider financing, timing, occupancy, sale history, other real estate activity, and whether the taxpayer’s conduct supports the stated personal intention.

A related income tax issue is the federal residential property flipping rule. That rule applies to certain dispositions after 2022 and generally treats a gain from the sale of a Canadian housing unit, or an assignment of a right to acquire one, as business income if the property was held for less than 365 consecutive days, unless a specific exception applies. This rule is separate from the GST/HST “builder” analysis in Fadali. However, both rules reflect a similar concern: short-term residential resale activity may be treated as commercial or profit-oriented activity rather than ordinary personal home ownership.

That distinction is critical. The residential property flipping rule determines the income tax treatment of the gain. The GST/HST issue in Fadali is different: it asks whether the taxpayer was a “builder” and whether the sale of the newly constructed home was taxable for GST/HST purposes. Even where the flipping rule does not apply, the CRA may still assess GST/HST if the facts show that the taxpayer built and sold the property in circumstances that fall within the GST/HST builder rules.

For taxpayers, the practical message from Fadali is straightforward. A new home sale is not automatically exempt from GST/HST simply because the property is residential. If the facts suggest a profit-making project, the CRA may assess GST/HST, interest, and penalties. Taxpayers should obtain advice from an experienced Canadian tax lawyer before listing or selling a newly built home, especially if the property has never been occupied or is sold shortly after completion.

How the Severance and New Home Sale Led to a GST/HST Dispute

In 2015, the taxpayer purchased an interest in 5 Carluke Crescent in Toronto. The property was later severed into two lots, 5A Carluke and 5B Carluke. The existing house was demolished, and two new detached homes were constructed.

The taxpayer said the project was part of a family living plan. He claimed that 5A Carluke was intended for his mother and that 5B Carluke was intended to become his personal residence. Construction of 5A Carluke was completed around March or April 2019. Construction of 5B Carluke was completed shortly thereafter. 5B Carluke was listed for sale in August 2019 for $4.75 million, sold under an agreement reached in October 2019 for $4.425 million, and closed in January 2020. It was never occupied before the sale.

After receiving professional tax advice, the taxpayer filed a GST/HST return in May 2021. He reported $509,071 in GST/HST collectible, claimed $305,812 in input tax credits, and remitted $203,259. The CRA assessed him for the full GST/HST collectible, denied the input tax credits, and assessed interest and a late-filing penalty. The CRA later directed him to the section 257 rebate process for non-registrants. He claimed a rebate of $304,901, but the CRA allowed only $181,613.

The appeal, therefore, turned on three practical issues: whether the taxpayer was a builder, whether the sale was subject to GST/HST, and whether he could recover construction-related GST/HST through input tax credits.

Why Builder Status Matters

The central GST/HST issue was whether the taxpayer fell within the definition of “builder” in section 123(1) of the Excise Tax Act. A person may be a builder if the person has an interest in land and constructs, or hires someone else to construct, a residential complex on that land. In this case, the taxpayer had an interest in the property and retained another company to manage and complete construction.

For individual taxpayers, the key question is often whether the construction was truly personal or connected to a profit-making project. A person who genuinely builds a personal home may fall outside the definition of a builder. But a person who builds a home as a profit-making project may be a builder, even where there is only one isolated transaction.

In Fadali, the Crown accepted that the taxpayer was not carrying on a business. The question was whether the construction and sale of 5B Carluke appeared to be a personal residence project or a commercial venture. The Court concluded that it looked like a commercial venture.

Why the Court Rejected the Personal Residence Explanation

The Court did not simply accept the taxpayer’s statement that he intended to live in 5B Carluke. It tested that statement against the surrounding facts.

The nature of the property was neutral. A house can be either a personal residence or part of a commercial project. The fact that 5B Carluke was residential did not, by itself, determine the GST/HST result.

Several facts worked against the taxpayer. First, 5B Carluke was listed almost immediately after construction was completed. It existed as a completed home for only about six months before it was sold. It was also never occupied. For taxpayers, this is one of the clearest warning signs from the case. A quick listing after completion, especially where the home was never lived in, can seriously undermine a personal-use explanation.

Second, the Court considered the taxpayer’s other real estate activity. The taxpayer had previously bought another property, lived there, demolished the existing home, built a larger new home, and sold it. He later acquired another property and began another construction project. The Court did not decide the tax treatment of those other projects, but it considered the pattern relevant to the taxpayer’s intention.

Third, the Court did not accept the taxpayer’s explanation that the sale resulted from a change in family circumstances. The taxpayer said his mother’s health declined, that the original plan for her to live at 5A Carluke did not proceed, and that he therefore moved into 5A and sold 5B. The Court found this explanation unpersuasive.

Fourth, financial capacity was a major concern. The project involved expensive land, large homes, architects, interior designers, elevators, gyms, substantial construction costs, and significant financing. The taxpayer’s employment income was modest compared with the size of the project, and he had reduced his work hours while focusing on construction. The Court found it improbable that the taxpayer had the financial ability to build 5B Carluke as a personal residence.

Finally, the Court was concerned by gaps in the evidence, including the source of certain funds, the extent of the mother’s financial contribution, and how sale proceeds were distributed. The Court found aspects of the taxpayer’s evidence less than forthcoming. Taken together, the facts did not support the claimed personal residence intention.

Because 5B Carluke was never occupied, the taxpayer could not rely on the exemption for certain sales by builders where the property was used primarily as a place of residence. Since the taxpayer was a builder and no exemption applied, the sale was taxable.

Why the Taxpayer Could Not Claim Input Tax Credits

The taxpayer’s alternative position was that, if he had to collect and remit GST/HST on the sale, he should be allowed to claim input tax credits for GST/HST incurred during construction. The Court rejected that argument.

An input tax credit generally allows a GST/HST registrant to recover GST/HST paid or payable on property or services acquired for use in taxable commercial activities. The problem for the taxpayer was timing. Section 169(1) requires the person claiming input tax credits to be a registrant during the reporting period in which the GST/HST became payable.

The taxpayer was not a registrant when he incurred GST/HST on the construction of 5B Carluke. He became a registrant only after the sale had closed. The Court also explained that he was not required to be registered, because his only commercial activity was an isolated supply of real property by way of sale otherwise than in the course of a business.

The correct recovery mechanism was therefore not input tax credits, but a section 257 rebate for non-registrants. That rebate is meant to provide relief where a non-registrant makes a taxable sale of real property. However, a taxpayer cannot recover the same tax twice by claiming both input tax credits and a rebate. The amount of the section 257 rebate remained subject to a separate objection process. This is why taxpayers should speak with an experienced Canadian tax lawyer before filing a GST/HST return or claiming input tax credits in connection with a new home sale.

Late-Filing Penalty and the Limited Success on Appeal

The taxpayer also challenged the late-filing penalty under section 280.1. The Court rejected his due diligence argument. The GST/HST return was due by February 29, 2020, but it was not filed until May 2021. Taking steps more than a year later to file the return and remit an amount did not establish due diligence.

However, the taxpayer succeeded on one narrower point. The Court held that the penalty should be recomputed under section 296(2.1) to take into account the rebate that the CRA had allowed. In other words, even though the taxpayer lost on builder status and input tax credits, the penalty had to be recalculated to reflect the rebate amount recognized by the CRA.

 

Four Pro Tax Tips: Practical Guidance for Taxpayers Building and Selling New Homes

  1. Taxpayers should not assume that a residential property sale is exempt from GST/HST simply because the property is a house. The GST/HST result depends on whether the seller is a builder, and whether an exemption applies.
  2. Intention must be supported by objective evidence. If a taxpayer claims that a new home was built for personal use, that claim should be consistent with financing, timing, occupancy, family circumstances, and conduct before listing the property.
  3. Quick listing after construction is a serious risk factor. In Fadali, the fact that 5B Carluke was listed almost immediately after completion, and was never occupied, strongly undermined the personal residence explanation.
  4. Taxpayers should obtain GST/HST advice early from an experienced Canadian tax lawyer and understand the difference between ITCs and section 257 rebates. Before starting, listing, or closing a new construction sale, taxpayers should confirm their GST/HST obligations. A non-registrant vendor may have access to a section 257 rebate, but that does not mean the vendor can claim input tax credits. Registration status and timing are critical.

FAQ: Key Questions on GST/HST, Builders, and New Home Sales

Can an individual be a “builder” even if the person is not in the construction business?

Yes. The Court accepted that the taxpayer was not carrying on a business. However, an individual may still be a builder if the construction is carried out in the course of an adventure or concern in the nature of trade. A one-time profit-making project may be enough.

Does saying that a home was intended as a personal residence avoid GST/HST?

Not necessarily. The Court will consider objective evidence. In Fadali, the Court rejected the taxpayer’s personal residence explanation because it was inconsistent with the quick sale, lack of occupancy, prior similar activity, financing concerns, and gaps in the evidence.

Why could the taxpayer not claim input tax credits?

The taxpayer could not claim input tax credits because he was not a registrant when the construction-related GST/HST became payable. The Court held that the proper relief for a non-registrant in this setting was a section 257 rebate, not input tax credits.

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.