Introduction – Goods and Services Tax & Excise Tax Act

Introduced in 1991, the Goods and Services Tax (“GST”) is governed by Part IX of Canada’s Excise Tax Act (“ETA”). The GST is a “value-added” tax system in that it is imposed on the price of most goods and services at each stage from the supply of raw material, production, distribution to the sale to the consumer. Certain provinces, including Ontario, have harmonized their provincial sales tax with the GST thereby implementing the Harmonized Sales Tax (“HST”). Both the GST and HST are administered by the Canada Revenue Agency (“CRA”) and governed by the ETA. This article may refer to the combined taxes as GST/HST or simply to the GST.

How Does the GST Apply & Who Pays GST?

The GST applies nationally on most goods and services made in Canada. For cross-border transactions, the GST applies on most goods and services acquired outside Canada but are imported for the use, consumption and enjoyment in Canada.

Under subsection 165(1) of the ETA, every recipient of “taxable supply made in Canada” is required to pay tax in respect of the supply purchased at a rate of 5% on the value of the consideration made for the supply (ETA Subsection 165(2)). A “taxable supply” is a supply made in the course of a commercial activity and “supply” includes sale, transfer, barter, exchange, licence, rental, gift, lease or disposition (ETA Subsection 123(1)). In normal English the recipient of a taxable supply is a purchaser.

Under subsection 165(3) of the ETA, certain goods and services are taxable at a rate of 0% and are referred to as “zero-rated” supplies. For examples, groceries, drug prescription and exported goods constitute “zero-rated” supplies. This means that zero-rated supplies are not subjected to GST/HST, however supplier may be eligible to claim input tax credits (which are discussed further below) for the GST/HST paid or is payable on the goods and services acquired to provide these zero-rated supplies.  There are also certain goods and services which are exempt from GST (ETA Subsection 165(4)). To illustrate, educational services and financial institution services are exempt from GST. The means that supplies are not subjected to GST/HST and suppliers are not entitled to claim input tax credits on the goods and services acquired to provide these supplies. Generally, businesses that only provide tax exempt supplies are not permitted to become GST/HST registrants with the CRA, however certain businesses are exempt from this rule including financial institutions that are resident in Canada.

Registering for & Collecting the GST

Under the GST, vendors (as knowns as “registrants”) of goods and services must collect the GST, on behalf of the CRA, on all taxable supplies that they provide to their customers. Pursuant to Part IX of the ETA, a registrant means as a person (including business) who is registered or is required to register with the CRA for GST/HST purposes.

A person is required to register with the CRA for GST/HST purposes if they (1) make taxable sales, leases or other supplies in Canada, and (2) are not a small supplier. A small supplier is a person (including business) whose revenue from taxable supplies does not exceed $30,000 in a calendar quarter or over the previous four consecutive calendar quarters. Persons who do not meet this threshold may voluntarily register with the CRA for GST/HST purposes in order to be able to claim input tax credits.

For domestic transactions, the GST is charged and collected by the vendor from their customers. In this context, vendors play a significant intermediary role between the consumer and the CRA. For cross-border transactions, either the importer, exporter or authorized representatives of the Canada Border Services Agency may collect the GST. Canada is engaged with countries all over the world in various trade agreements, such as NAFTA, which include provisions pertaining to the application of GST on cross-border transactions.

Filing the GST Return & Remitting the GST Collected to the CRA

As previously mentioned, GST registrants must charge and collect the GST from their customers. Registrants must also file GST returns to report the tax charged to and collected from their customers to the CRA. When reporting the GST charged and collected, registrants are entitled to claim an input tax credit (“ITC”) for the amount paid to their suppliers on goods and services purchased, used or consumed during their commercial activities.

To claim an ITC, registrants must first meet the documentary and information requirements set out in section 169 of the ETA. Specifically, registrants must obtain sufficient documentary evidence to support their ITC claim from their suppliers. For example, registrants should obtain a receipt or an invoice outlining certain information including the supplier’s name, total amount paid or payable, date of the transaction and all other relevant details.

Further, registrants must calculate the GST amount collected from their customers minus the amount paid to their suppliers and where the difference is a negative balance, they (the registrants) are entitled to a refund when filing their GST/HST tax return. However, where the difference between the GST collected and the input tax credit is positive, then the registrant is obligated to remit this amount to the CRA.

GST Misuse & Abuse

Despite the legislative framework, there are ongoing major concerns with respect to the misuse and abuse of the GST provisions under the ETA. In R. v. Scholz, the Ontario Court of Justice found the defendant guilty of defrauding Canada’s income tax and GST/HST systems pursuant to subsection 380(1) of the Criminal Code. In this case, the defendant was ordered to pay a fine of $445,789 for the GST/HST he failed to remit and was sentenced to a 24 months conditional sentence. In R. v. Di Giuseppe, the Ontario Court of Appeal upheld the Appellant’s fraud conviction and explained that the “public economic interest was placed at risk due to the accused’s making of false GST filings, failure to file GST return and failing to file T2 Income Tax returns”. In this case, the Appellant was sentenced to six months imprisonment and was ordered to pay a fine of $2 million dollars.

GST fraud may appear in other scenarios including, but not limited to:

  • registrants billing their customers for GST, collecting the taxes then disappearing without remitting the tax to the CRA;
  • registrants agreeing to exclude GST from the purchase price of goods and services, when it should be included;
  • customers paying cash for purchased services and goods to avoid paying the taxes; and
  • registrants falsely claiming a GST exemption on their purchased supplies.

These activities constitute GST/HST tax evasion and tax fraud as set out in section 327 of the ETA.

The penalties provision sets out a fine between 50% to 200% of the amount of the tax that was sought to be evaded and up to two years imprisonment (ETA Subsection 327(1)). In addition, subsection 327(2) grants the Attorney General of Canada discretionary powers to proceed by way of indictment in which case the fine is between 100% and 200% of the amount of tax that was sought to be evaded plus up to five years imprisonment.

Further, under section 487 of the Criminal Code, authorized representatives of the CRA’s Criminal Investigations Program can apply to a judge for a search warrant in certain circumstances including GST tax evasion. Moreover, a person who fails to file or make a return as required by subsection 326(1) of the ETA can be fined up to $25,000 or face up to 12 months of imprisonment.

Tax Tips – Voluntary Disclosures Program

GST/HST tax evasion and tax fraud creates detrimental consequences for taxpayers, the Canadian government and our economy. For instance, where registrants falsely claim to be exempt from paying GST on their purchases, it is likely that the Canadian government will have to bear the full tax loss. On the one hand, ITCs incentivize taxpayers to proactively report the GST charged and collected in order to secure the credit and they promote proactive compliance with the legislation. On the other hand, ITCs and their documentary requirements give rise to the misuse and abuse of the GST provisions under the ETA in cases where the information provided is insufficient or incorrect.

Like Canada’s income tax system, the GST is a self-reporting system that “relies on the honesty and integrity of taxpayers”, as was stated in the Supreme Court of Canada’s leading decision, Knox Contracting Ltd. v. Canada. Under this self-reporting system, registrants play a significant intermediary role from charging and collecting the tax, to reporting and remitting the tax collected to the CRA. Consumers also have an obligation under the ETA to pay the GST imposed on acquired goods and services and to avoid activities that promote any misuse and or abuse of the GST system. If you are charged with tax fraud or tax evasion, or if you have questions regarding the CRA’s investigation of your GST/HST tax returns, please contact our tax law office to speak with one of our experienced Certified Specialist in Taxation Canadian tax lawyers.

Flipping houses is predicated on the resale of valuable assets, and the high transaction costs that take place come with multiple tax implications. In particular, businesses in this field must understand the nuances of the goods and services tax.

The Canada Revenue Agency is Looking at GST on House Flipping

GST is substantial, has available rebate programs and is coming under increased scrutiny of the Canada Revenue Agency. In Ontario alone, the agency audited 28,578 filings totaling $495.2 million for GST/HST-related matters between April 2015 and December 2018. Much of the increased attention has been specifically looked at paid and unpaid GST on house flipping transactions.

With regards to GST and house flipping, there are two sides of the tax that businesses have to consider. The first is the GST they pay for any renovations made to homes, and the second is any GST that’s charged to homebuyers. In both matters, of course, the goods and services tax is combined with the provincial sales tax into Ontario’s harmonized sales tax.

Claiming the GST/HST New Housing Rebate on Substantial Renovations

The GST/HST New Housing Rebate refunds GST paid for new home construction or substantial existing home renovation if the house is used as a dwelling place. The rebate is most often claimed by homeowners who are purchasing their primary residence, but it can sometimes be claimed by other parties.

Under the program’s provisions for other parties, businesses that pay GST on flipping homes in ontario  projects which involve renovations may be able to reclaim a portion or all of their paid GST. There are multiple criteria that must be met in order to claim the GST/HST New Housing Rebate when flipping homes, but the biggest one is that a renovation must be “substantial.”

“Substantial” renovations are defined as those that either:

  • Increase the size of a residence by at least 100 percent
  • Remove or replace at least 90 percent of the interior

Most flipping houses in canada projects don’t meet the first criterion, but renovations of fixer-uppers may meet the second depending on the hst real estate ontario  of the house when purchased and level of renovations performed. For businesses that pay GST on flipping houses in toronto fixer-upper projects, getting some of the paid GST back is a major benefit as a lot of goods and services are usually paid for during these projects.

In total, businesses that flip a house with a qualifying renovation project may get up to $6,300 back from the federal government and $30,000 back from Ontario.

person flipping home

Charging GST on House Flipping Property Sales

When the time to sell a flipped property comes, most businesses are required to charge the buyer GST. There are a couple of exceptions that may apply to this general rule, but they are the uncommon exception rather than the norm.

Businesses with Minimal Income

First, businesses that have minimal income might not be required to charge GST. In select instances, businesses that make less than $30,000 annually aren’t required to charge GST/HST.

Businesses that flip houses, however, frequently make more than $30,000 in the years that they sell properties. Barring a major mistake or downturn in the real estate market, most businesses that successfully flip houses expect to make over $30,000 a year. In fact, it’s fairly common to make that much on a single sale.

Even if a business does make less than $30,000 in a year, there are still incentives for charging GST. Charging GST is normally a prerequisite to taking advantage of any available Input Tax Credits, which many businesses rely on.

Homeowners Flipping Primary Residences

Second, homeowners who sell their primary residence at a profit don’t need to charge GST on the sale of their home under the principal residence exemption. A number of individuals and businesses have tried to take advantage of this program when flipping houses by claiming a house is a primary residence when it really doesn’t meet the exemption criteria. This is the type of evasiveness the Canada Revenue Agency is investigating more frequently and thoroughly.

In order to qualify as a primary residence, individuals must:

  • Consistently live in the home
  • Have another source of income (other than flipping)
  • Prove they didn’t purchase the house with the sole purpose of generating income from it

Consistently living in the property typically requires moving in shortly after the purchase and any necessary renovations are complete, and remaining there for some time. Additionally, living mostly in another residence isn’t allowed.

In the event that a house was a primary residence for a portion of the time that an individual owned the property, a portion of the sale may be exempt from GST. For example, a homeowner that lived in a house for four out of five years can likely claim 80 percent of the property’s appreciation as exempt.

GST Must Be Charged on Most Home Sales

After all requirements are considered, most businesses in this field must charge GST on house flipping sales. Businesses are then responsible for remitting that payment to the Canada Revenue Agency, and failing to do so can lead to financial and legal consequences.

GST, however, doesn’t necessarily need to be a barrier that keeps people from buying houses. Those same federal and provincial GST/HST New Housing Rebate programs that house flippers can sometimes take advantage of are only more widely available to home buyers. Many home purchases qualify for these rebates so long as the home will be used for someone’s primary residence (regardless of whether that person is the owner or a tenant).

Thus, buyers of flipped houses can often get a large portion or all of the GST they pay during a home sale back. If businesses simply make sure buyers are aware of this rebate program, potential buyers will understand that GST is charged but returned. It’s not a cost that really adds to the net purchase price once the rebate is paid back.

Work with a Law Firm That Understands GST on House Flipping

While these broad guidelines are generally true, the laws regarding GST and house flipping are detailed and complex. To make sure your business is in compliance with all applicable laws and taking advantage of every program available, work with a law firm that specializes in GST on house flipping.

FAQ’s

For the most part, exempt professions belong to the healthcare and education sectors. However, there’s a firm divide in the healthcare sector, so ensure that your profession is exempt before neglecting to pay taxes.

An auditor from the Canadian Revenue Authority will examine a business’s financial records during an HST or GST audit. The auditor will conclude whether the company is paying the appropriate amount of sales tax.

Generally, HST or GST is payable in the province that the goods get delivered. However, in some cases, the region with the higher tax rate will determine the taxation rules.