Introduction – GST/HST Obligations of Self-Employed Sex Workers in Canada

Sex workers provide services ranging from phone-sex operators, erotic dancers, sex-toy makers, and strip-club managers to pornographic actors, webcam models, and prostitutes.

All Canadian sex workers have one thing in common, however: tax. In particular, a self-employed Canadian sex worker might need to register for a GST number and start charging GST (and any applicable provincial sales tax, like HST) on services provided or goods sold to clients.

This article discusses the GST/HST obligations of self-employed Canadian sex workers carrying on business through a sole proprietorship, partnership, or a private corporation. It ends by offering tax tips to Canadian sex workers.

Sex Work as a Taxable Supply & The Requirement to Register for GST/HST

Section 165 of the Excise Tax Act imposes GST/HST on “every recipient of a taxable supply made in Canada.” A “taxable supply” is the provision of a property or service in the course of a commercial activity, or in plain English the sale of goods or services. Basically, it captures most business transactions—including the exchange of sexual services for financial gain.

The obligation to pay GST/HST falls on the person who receives (i.e., purchases) the good or service; the obligation to actually collect the tax falls on the person who makes the supply—that is, the supplier of the good or service. A supplier need not collect GST/HST if earning less than $30,000 in gross revenue annually. But a Canadian business earning $30,000 or more in worldwide gross revenues must register for a GST/HST number and begin charging GST/HST on services provided or goods sold. Failure to do so is subject to tax penalties plus interest and possible prosecution for tax evasion.

This means that, if earning $30,000 or more in gross revenue, a self-employed sex worker must register for a GST/HST number with the CRA, charge GST/HST on goods and services, collect that GST/HST, and pay it to the CRA.  This also means that a bookkeeping system has to be put in place and the business is subject to a tax audit by CRA.

If the sex worker paid GST/HST to business vendors, the sex worker may claim those amounts as an input tax credit (ITC), thereby reducing the net GST/HST payable to the Canada Revenue Agency.  Examples of amounts claimable as ITCs include the GST/HST payable on commercial rent, the purchase of internet services, or cell-phone use to the extent that it is business related.

GST/HST Filing Requirements for Self-Employed Canadian Sex Workers

If obligated to register for GST/HST, the sex worker must file GST/HST returns for each reporting period—even if the worker earned no revenue during that period or had no net GST/HST payable for that period.

The length of a taxpayer’s GST/HST reporting period determines when it must file GST/HST returns and pay the net GST/HST.  A GST/HST reporting period can be annual, quarterly, or monthly.

  • If the reporting period is monthly, then that reporting period’s GST/HST return and net GST/HST payable are both due by the end of the following month.
  • If the reporting period is quarterly, then that reporting period’s GST/HST return and net GST/HST payable are both due within one month from the end of the quarter.
  • If the reporting period is annual and the business is incorporated, then that reporting period’s GST/HST return and net GST/HST payable are both due within three months of the fiscal year-end.
  • If the reporting period is annual and the business operates as a sole proprietorship, then that year’s GST/HST return is due by June 15th of the following year. But that year’s net GST/HST payable is due by April 30th of the following year. (In other words, the filing and payment deadlines match those for income tax.)

The length of a reporting period depends on the business’s annual revenue during the last fiscal year. A business that earned $1.5 million or less may opt for an annual, quarterly, or monthly GST/HST reporting period. A business may opt for a quarterly or monthly GST/HST reporting period if it earned over $1.5 million but not more than $6 million. And a business must use a monthly GST/HST reporting period if it earned over $6 million during the last fiscal year.

Director’s Liability for the Unremitted GST/HST of an Incorporated Business in the Sex Industry

A corporation is a separate legal entity. That is, the corporation’s obligations, rights, and liabilities are its own; they generally don’t extend to the corporation’s shareholders, directors, or employees. So, if the corporation, say, defaults on a loan or on rental payments, the creditor may sue the corporation for the unpaid debt, but the shareholders aren’t personally liable because the corporation, not the shareholders, borrowed the funds or signed the lease. Of course, if the lender or landlord obtained a personal guarantee from the shareholder, then the shareholder would be liable, but the liability comes from being the guarantor, not from being the shareholder.

That said, a sex worker who solely owns and operates an incorporated business should know that the Canada Revenue Agency can pursue the corporation’s director for the corporation’s GST/HST debts.  If the corporation failed to remit GST/HST, subsection 323(1) of the Excise Tax Act confers vicarious tax liability on “the directors of the corporation at the time the corporation was required to remit.” Each director becomes “jointly and severally liable” to pay the corporation’s unremitted GST/HST.  In other words, if serving as the director of a corporation with GST/HST debts, the sex worker may personally inherit that GST/HST liability.

Tax Tips – Claiming Input Tax Credits, Avoiding Director’s Liability, and Correcting Non-Compliance under the Voluntary Disclosures Program

As mentioned above, a sex worker may reduce the net GST/HST payable to the CRA by claiming input tax credits. The amount of the ITC equals the amount of GST/HST that the sex worker paid to its commercial suppliers. Depending on the nature of the sex worker’s business, the sex worker might claim ITCs for the GST/HST payable on, for instance, the purchase of condoms, makeup, leather bondage apparel, sex toys, pornographic material, or lingerie; the manufacturing or importing of sex toys, porn, stripper poles, etc.; home renovations to create a BDSM or dominatrix dungeon; or the Internet and service costs to run a webcam sex show.

To qualify for an ITC, however, the sex worker must meet certain criteria. For instance, the sex worker must have been a GST/HST registrant during the reporting period in which the GST/HST was paid or became payable. The sex worker must also obtain documentary evidence substantiating the ITC. Our experienced Canadian tax lawyers can provide GST/HST advice about the benefits of registering for GST and about qualifying for and claiming ITCs.

If serving as the director of a corporation with GST/HST debts, the sex worker may personally inherit that GST/HST liability. The Excise Tax Act prescribes a two-year limitation period on a director’s exposure to a corporation’s GST/HST debt. The Canada Revenue Agency cannot assess a director for a corporation’s GST/HST arrears “more than two years after the person last ceased to be a director of the corporation.” So, the sex worker may limit exposure by resigning—thereby starting the clock on the two-year limitation period. But the resignation must meet the requirements of the governing corporate law. Further, after resigning, the sex worker must cease all tasks that only a director may perform. By continuing to carry out the duties of a director, the sex worker remains vulnerable to a director’s liability assessment even after validly resigning. Consult one of our expert Canadian tax lawyers for advice on ensuring that a director’s resignation is both valid and able to withstand CRA scrutiny.

By failing to comply with GST/HST obligations, a sex worker can face monetary tax penalties and criminal tax prosecution. In many cases, the best remedy is the Canada Revenue Agency’s Voluntary Disclosures Program, which provides qualifying taxpayers with relief from tax penalties and tax prosecution. Our experienced Canadian tax lawyers have helped countless taxpayers avoid sanctions with the Voluntary Disclosures Program. To find out whether you qualify—or to discuss your options if you don’t—consult one of our certified Specialist in taxation Canadian tax lawyers today.

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.