Contents
Overview: What Salehi v The King Means If You Built, Lived In and Sold Your Own Home
Background: The Builder Definition and the Happy Valley Framework
Key Issues and Findings: How the Tax Court Decided the Homeowner Was an HST Builder
58 Walder Avenue: A Redevelopment Project Dressed as a Family Home
The Occupation Evidence and the Limits of Subsection 191(5)
17 Dunblaine Avenue: Family Members as Cover for the Taxpayer’s Own Project
The Trust Argument: A Retroactive Declaration Creates Nothing
No Duty to Collect Is Not the Same as No Liability: Section 194 and HST Inclusive Pricing
Practical Implications for Homeowners, Developers and Their Advisors
CRA Audit Risk: The Red Flags That Trigger an HST Builder Tax Audit
Strategic Takeaways for CRA Disputes Over New Home HST
Pro Tax Tips: Protecting a Genuine Family Build from a Builder Tax Assessment
Frequently Asked Questions – About HST When You Build and Sell a Home
Overview: What Salehi v The King Means If You Built, Lived In and Sold Your Own Home
The Tax Court of Canada decision in Salehi v The King, 2026 TCC 139 [Salehi], is a reminder that GST/HST exposure on a newly built home turns on intention, and that intention is established by conduct rather than by paperwork. The Tax Court of Canada dismissed Amir Salehi’s appeals from a May 19, 2019 CRA assessment covering two Toronto properties, 58 Walder Avenue and 17 Dunblaine Avenue, finding that Mr. Salehi was a builder within the meaning of section 123 of the Excise Tax Act in respect of both homes because each project was an adventure in the nature of trade, which in practical terms means a one off venture undertaken to make a profit, so no corporation, employees or prior real estate experience is required and a single house can qualify. His intention was measured by permits, financing terms, listing dates and utility records rather than by his own account of what he had planned.
The decision matters well beyond its facts. On 58 Walder, the Court held that the self-supply rule in subsection 191(1) applied and that the saving provision in subsection 191(5) did not, because the family’s brief occupation of the completed house was, in the Court’s words, “window dressing”, and the primary use of the property remained inventory for resale. On 17 Dunblaine, the Court rejected a trust declaration as a retroactive document that created nothing, and then went further: even though the taxpayer was relieved of any obligation to collect HST because the purchaser was a registered corporation, he was still assessable, first because section 194 deemed him to have collected the tax after he certified the supply as exempt, and second because the HST-inclusive pricing clause in his agreement of purchase and sale meant he had in fact collected an amount as or on account of tax that was never his to keep.
For any taxpayer who builds, occupies briefly and sells, and for the accountants and lawyers who advise them, Salehi is now among the most instructive authorities on how the CRA builds a builder case and how a court tests the taxpayer’s narrative against the documentary record. It is also a cautionary tale about credibility, about redacted electronic evidence, and about the consequences of not calling a witness you have told the Court you intend to call.
Background: The Builder Definition and the Happy Valley Framework
The GST/HST treatment of a newly constructed home sold by an individual depends on a single statutory pivot. Section 2 of Part I of Schedule V to the Excise Tax Act exempts a residential complex supplied by a person who is not a builder. If the vendor is a builder, the exemption is unavailable and the sale is taxable. Section 123 defines a builder to include a person who has an interest in the real property at the relevant time, builds or engages another person to build a residential complex. Individuals receive a carve-out from that definition, but only where the construction is not carried out in the course of a business or an adventure in the nature of trade.
Where an individual is found to be a builder, one of two provisions is usually engaged. If the builder occupies the completed home as a place of residence, the self-supply rules in subsection 191(1) deem a taxable supply and deem the builder to have collected tax equal to the fair market value of the property. If the builder sells without moving in, the ordinary rules apply and tax is payable on the sale, subject to an important qualification: where the purchaser of the real property is registered for GST/HST, subsection 221(2) relieves the vendor of the obligation to collect and subsection 228(4) shifts the self-assessment and remittance obligation to the purchaser.
As discussed below, that relief from the duty to collect is not the same as relief from liability, and it was the central battleground on the second property in Salehi. Subsection 191(5) overrides the self-supply rule where the builder occupies the complex primarily as a place of residence for the individual or a related person, and the complex is not primarily used for any other purpose. The Tax Court emphasized the statutory word primarily: a home can be lived in and still fail the test if its primary use is, or remains, inventory.
The structural difficulty for any homeowner in this position is that whether a project is an adventure in the nature of trade turns on intention, and intention is proved by conduct rather than by assertion. A single commercial transaction can qualify even where it falls well short of an organized business. The practical question is whether the project looks, on the documents, like the creation of a saleable product rather than the creation of a home: was the property bought because it could be severed or redeveloped, were the design and finishing choices aimed at the market rather than at the family’s own preferences, was the financing structured for a short holding period, and was the sale set in motion as soon as the house became habitable.
Because intention at the time of acquisition is almost never recorded anywhere directly, the CRA and the Court work from those proxies, and a secondary intention to sell at a profit if the opportunity presents itself can be enough where the stated plan to occupy is not carried through in fact. Happy Valley Farms Ltd. v The Queen, 1986 CanLII 7434 (FC) [Happy Valley] sets out the non-exhaustive factors, restated in Fadali v The King, 2026 TCC 86 (see the firm’s case comment on Fadali v The King) the nature of the property, the length of ownership, the frequency or number of other similar transactions, the work expended on the property, the circumstances leading to the sale, and motive.
Read together, those factors function less as a balanced weighing exercise than as an evidentiary audit trail, and most of them are documented by third parties long before a dispute arises. Permits, construction financing, trade invoices, listing history and the timing of the sale are all in the CRA’s hands, or readily obtainable, and each of them speaks to intention without the taxpayer saying a word. The Court also applied Wall v Canada, 2021 FCA 132 [Wall] (see the firm’s case comment on Wall v Canada), in which the Federal Court of Appeal confirmed that what matters is not simply how long the taxpayer owned the property but how long the taxpayer owned it after it was ready to be lived in.
Of those factors, length of ownership is the one taxpayers most often misread. Wall makes clear that the relevant clock does not start on the date of purchase. What matters is how long the taxpayer held the property after it became habitable, which means that years spent assembling land, obtaining approvals, and building are largely irrelevant to the analysis. A taxpayer who spent three years constructing a home and sold it four months after occupancy is, on the Wall approach, a short-term holder, notwithstanding a three-and-a-half-year period on title. That single point defeats a large proportion of the defences advanced in these disputes.
Two further strands of authority narrow the escape routes that taxpayers typically reach for. The first is the argument that the taxpayer occupied the home as a place of residence. Practitioners have leaned on Coates v The Queen, 2011 TCC 74 [Coates] for the proposition that a relatively brief period of occupation will suffice, but the Court treated that Informal Procedure decision with express caution and preferred Caddell v The King, 2026 TCC 27 [Caddell] (see the firm’s case comment on Caddell v The King) together with the Federal Court of Appeal’s decision in Lacina v R, [1997] CarswellNat 1563, [1997] F.C.J. No. 998 [Lacina]. The requirement those cases impose is qualitative rather than arithmetical: occupation must have an enduring quality before it can be characterized as primarily residential. A taxpayer who moves in with a listing already contemplated does not satisfy that standard no matter how many nights are documented.
The second is the argument that registered title does not reflect beneficial ownership. Here the obstacle is Canada v Cheema, 2018 FCA 45 [Cheema] (see the firm’s case comment on Cheema and the bare-trustee rebate rule), in which the majority of the Federal Court of Appeal cautioned against converting what the Excise Tax Act designs as a straightforward verification exercise at closing into a wide-ranging inquiry into who really owns the property. The practical consequence is asymmetric. Beneficial ownership arguments are available to the CRA when it wants to look through a family member on title, but far less available to a taxpayer seeking to disclaim a project the documents show they controlled.
Key Issues and Findings: How the Tax Court Decided the Homeowner Was an HST Builder
Both properties turn on the same underlying question dressed differently: does the paper trail show a family building a home, or a taxpayer building to redevelop and sell, using a relative as the nominal owner where convenient? Walder answers that question mainly through the occupation evidence; Dunblaine answers it mainly through the financing and trust structure layered on top of an otherwise identical project.
58 Walder Avenue: A Redevelopment Project Dressed as a Family Home
Mr. Salehi bought 58 Walder Avenue in July 2013 as tenants in common with Farahnaz Emami, a widow and second cousin of his wife, Parisa Rejal. The lot was already approved for severance. The existing one-storey house was demolished, the lot was divided, and two detached homes were built. Mr. Salehi retained 58 Walder and Ms. Emami retained 60 Walder. Mr. Salehi began moving in around July 2014, before the occupancy permit was issued. The property was listed for sale in August 2014, four days after the permit was issued, sold under an agreement dated October 5, 2014, and closed on October 29, 2014. As the Court put it, the length of ownership was the minimum amount of time needed to list and sell the property.
The reasoning repays close reading, because it shows how little weight a taxpayer’s own account of a project carries against the documentary record. The Court treated 58 and 60 Walder as a single combined venture, noting that Ms. Emami listed her house for sale on the same day and that it was more than coincidental that both parties redeveloped and sold almost immediately. The mortgage arrangement was described as odd, because a single mortgage covered the whole property and left Mr. Salehi liable for debt on land he would never own, a risk that made commercial sense only if both homes were built to be sold at once. Ms. Rejal was not on title to what was supposedly her own dream home, and the evidence was largely silent as to any involvement by her in choosing appliances or finishes.
Two documents were particularly damaging. In November 2013, before the footings had even passed inspection, Mr. Salehi filed a change of address with the Ontario Ministry of Transportation showing 58 Walder as his address, which the Court called an untruthful registration intended to give the impression of a change of residence that had not occurred. On the sale, he gave the purchasers a two-year builder-style warranty covering Building Code compliance, structural defects, water penetration and the mechanical work, backed by a ten thousand dollar holdback, which the Court read as positioning the house to compete against homes offered by other builders.
The stated reasons for selling collapsed for a reason that extends well beyond this case: an explanation offered years later in litigation is tested against what the parties actually did afterwards. Mr. Salehi said the plan to live at Walder fell apart because his wife suspected an affair with Ms. Emami and because his son did not want to change schools. The son did not testify, and that evidence was given no weight. The Court accepted that there may have been genuine marital difficulty in 2014 but treated it as largely a pretext, because Ms. Emami had listed 60 Walder on the same day, because neither the taxpayer nor his wife would explain that point, and because the parties continued to transact together afterwards.
The Occupation Evidence and the Limits of Subsection 191(5)
The more consequential holding concerns subsection 191(5), and it narrows a provision that many advisors have treated as a safe harbour. The Court refused to accept that the subsection 191(5) inquiry is insulated from the Happy Valley intention analysis, or that a resale intention becomes irrelevant once the property is used as a family home after substantial completion. The basis for that conclusion is textual: the passage from Coates that taxpayers habitually quote omits the statutory language itself, which asks not whether the property was used as a family home but whether it was used primarily as a place of residence and is not primarily used for any other purpose.
The practical effect is that the two inquiries largely collapse into one, because the facts that establish primary use are the same facts that establish motive under Happy Valley. In Caddell, the Court cautioned against reading Coates as permitting taxpayers to build homes with a primary aim of selling them so long as they are willing to sojourn there beforehand. Lacina supplied the governing standard: residence must possess an enduring quality.
Applied to these facts, that standard exposed the occupation as minimal and staged, and the evidence that decided the point was mundane rather than legal. The utilities told the real story. The rental documents for the hot water unit pointed to late September 2014 rather than July, and the installer’s contrary evidence was given little weight as inconsistent with them and unsupported by any independent recollection. Conclusively, the October agreement of purchase and sale required the seller to ensure that there should be hot water in all bathrooms at least ten days before closing, from which the Court inferred that there had been no hot water in those bathrooms even though the taxpayer had ostensibly been living there for almost three months.
The Court therefore found that the taxpayer did not occupy the house primarily as a place of residence, that the occupation which did occur was window dressing to convey the appearance of an intent to occupy the home as the family residence, and that the primary use of the property remained at all times inventory for resale. Subsection 191(1) applied and subsection 191(5) did not. The distinction is worth stating plainly, because readers often assume that any period of living in the home is enough. Mere occupancy, in the sense of sleeping at the property for some weeks or months, is not what subsection 191(5) protects.
The provision asks whether the complex was used primarily as a place of residence and is not primarily used for any other purpose, so a family can spend real nights in a house and still fail the test where the property remains inventory held for resale. The lesson is that occupation is proved by utility accounts, insurance, school registrations and delivery records, not by testimony about intention.
17 Dunblaine Avenue: Family Members as Cover for the Taxpayer’s Own Project
In July 2015, less than a year after selling Walder, 17 Dunblaine Avenue was acquired. The old one-storey two-bedroom house was demolished, and a two-storey four-bedroom house was completed in December 2016 and sold in March 2017. No one moved in, so there was no self-supply issue; HST was assessed on the sale on the basis that Mr. Salehi was a builder.
The narrative advanced for Dunblaine, that the taxpayer’s elderly parents wanted a home of their own large enough to accommodate visits from his sister in Germany, failed on the documents rather than on credibility findings alone, and the gaps the Court identified are the gaps any auditor would look for first.
The signature on the offer to purchase did not match the mother’s signature on her power of attorney and no credible explanation was given. No evidence was adduced as to the source of the down payment or of any financing arrangements between mother and son. The taxpayer’s father, who was to live in the house, was completely absent from every document, including the trust declaration. And a small, old, two-bedroom one-bathroom house was inconsistent with a purchase intended to house multiple generations, from which the Court concluded that the property was acquired to be demolished and rebuilt.
The frequency factor was decisive here in a way it had not been for Walder. On Walder, the Court declined to reason backwards from later sales, describing that as hindsight. By 2015, however, there were four transactions in a short span. Walder had just been sold. 117 Poyntz was purchased in the name of the taxpayer’s father, who was in his early eighties and had no relevant experience, yet the taxpayer applied for the building permits and engaged the trades under a power of attorney, and his evidence that the purchase was his father’s own affair which he had never discussed with him was found so implausible that it undermined his credibility generally.
119 Poyntz was bought by the taxpayer’s wife and sold five days after Dunblaine closed, on explanations that contradicted each other. The Court concluded that Mr. Salehi was orchestrating the purchase, redevelopment and sale of multiple properties using his mother, father and wife as cover, and that by 2015 he was essentially engaged in buying, redeveloping and selling houses.
The stated reason for the sale, a decline in the Iranian Rial that left the parents unable to afford to live in the house, also failed. The Rial had declined only about ten per cent in 2016 and had been stable from May 2016 until after the sale; the family evidently had substantial funds outside Iran. As with Walder, the address changes told against him: he registered 17 Dunblaine with the Ministry of Transportation in March 2016 and with the CRA in May 2016, when there was no completed house to live in, and the Court found that the CRA change was designed to deceive the tax authority into believing he was living there. As David J. Rotfleisch, founding tax lawyer of Rotfleisch & Samulovitch P.C., a Canadian tax lawyer, chartered professional accountant, and Certified Specialist in Taxation Law (Law Society of Ontario), explains:
“The structure that failed here is the one I see most often in this area. The property goes into a parent’s or a spouse’s name while the taxpayer does all of the work, signs all of the documents under a power of attorney, engages all of the trades and carries all of the risk. Nominal title is not a tax plan. If a parent is genuinely the purchaser, the parent has to behave like a purchaser, and the file has to show where the money came from and on what terms. When the CRA reassesses and the only person who can explain any of it is the child, the question of who was carrying on the adventure in the nature of trade has already been answered.”
The Trust Argument: A Retroactive Declaration Creates Nothing
The trust analysis has the widest application of anything in the decision, because a declaration of trust is routinely offered to the CRA as the answer to an ownership problem. It does not work, and the Court’s catalogue of defects reads as a checklist of what makes such a document worthless. In closing, the taxpayer conceded that he was not a bare trustee but a trustee with duties to perform, which was consistent with the finding that he had done everything required to acquire, redevelop and sell the property. The defects were cumulative. The mother did not sign it; the taxpayer signed both personally and as her attorney, so there was no direct link between the document and her.
The father was absent from it even though the house was supposedly his too. It was signed on September 4, 2015, but dated as of July 8, 2015, and the timeline did not work, because on the taxpayer’s own evidence no trust was needed or contemplated in July, when the mother was still to take title. The document was a mashup, combining a declaration of trust with an indemnity from the mother and no clear indication of who settled the trust. It described the taxpayer as bare trustee, a designation he now disclaimed, and set out no rights, duties or responsibilities to guide the analysis. No witness signed it. It referred to the registration number of the mortgage rather than the transfer. The Court held that at best the taxpayer had prepared a document he may have thought would act as a kind of magic wand to create legal relations he wanted to exist but which did not.
The more important point, and the one that consistently surprises clients, is that even a valid trust would not have answered the assessment. Subsection 267.1(2) of the Excise Tax Act requires a trustee to satisfy every obligation imposed on the trust, and subsection 267.1(3) makes the trustee jointly and severally liable with the trust for all amounts payable and remittable, while there is no corresponding provision making the beneficiary liable. Mr. Salehi was liable either as owner or as trustee, so the CRA assessed the right person. The failure of the assessment to specify the capacity in which he was assessed changed nothing, because subsection 299(4) deems a CRA assessment valid and binding despite any error, defect or omission.
“Clients are frequently told that a declaration of trust will solve an ownership problem. It usually will not, for two separate reasons that Salehi sets out cleanly. First, a declaration signed after the fact by one person wearing two hats does not create a trust; it records a wish, and after-the-fact documents of that kind generally do not create tax-effective legal relationships unless they accurately evidence legal relations that already existed. Second, and this is the part that surprises people, even a valid trust would not have helped, because subsection 267.1 makes the trustee liable for the obligations of the trust and says nothing about the beneficiary. In a GST/HST matter, the trustee is the person who gets assessed. Read with Cheema, the message is that the CRA can work from registered title and the closing documents instead of being sent on an expedition to find the real owner.” David J. Rotfleisch.
No Duty to Collect Is Not the Same as No Liability: Section 194 and HST Inclusive Pricing
The most commercially significant part of the decision is the last. The purchaser of 17 Dunblaine, Heritage Seven Properties Limited, was a corporation registered for HST when it contracted to buy. Both parties agreed that, all things being equal, subsection 221(2) relieved the taxpayer of any obligation to collect tax, because a registered recipient of a taxable supply of real property must itself report and remit under subsection 228(4). Relief from the obligation to collect, however, is not relief from liability. The assessment survived on two independent grounds, and together they create an exposure that is easy to overlook when a sale closes on the shared assumption that no HST applies.
First, section 194 applied. On closing, the taxpayer signed a statutory declaration certifying that the conveyance constituted an exempt supply pursuant to Part I of Schedule V to the Excise Tax Act and that the agreement did not involve a taxable supply such that HST would be payable by the purchaser. Section 194 provides that where a supplier makes a taxable supply of real property by way of sale and incorrectly certifies in writing that the supply is exempt under one of the listed provisions, unless the recipient knows or ought to know otherwise, the tax payable is deemed to be the tax fraction of the consideration and the supplier is deemed to have collected it.
A certificate does not have to be precise to be effective against the vendor who signed it. The text requires only that the supply be certified as an exempt supply, and that the exemption be one described in the referenced provisions; it does not require the declaration to recite the specific exempting section. Certifying exemption under Part I of Schedule V was more than sufficient. A vendor cannot escape the consequences of its own declaration by drafting it imprecisely, and section 194 should be read on the assumption that it will be applied against the person who certified.
Second, and independently, the Court held that the taxpayer had actually collected HST. Paragraph 7 of the agreement of purchase and sale provided that if the sale was subject to HST, then such tax was included in the purchase price, and that if it was not, the seller would certify accordingly before closing. Heritage Seven paid the full price without holding back any amount for tax, because the taxpayer had certified the sale as exempt. Chandna v The Queen, 2009 TCC 230, an Informal Procedure decision that treated a similarly worded clause as too vague to establish collection, can no longer be relied on.
The Court preferred the 2025 and 2022 reasoning in the Ontario Superior Court decisions in Miculinic Investment Corporation v 2303515 Ontario Inc, 2025 ONSC 6269, and Stanziano v Wolfe, 2022 ONSC 3823, applying the contractual interpretation principles in Sattva Capital Corp v Creston Moly Corp, 2014 SCC 53, and held that clauses of this kind are not generally ambiguous: where HST is exigible, a purchaser subject to subsection 221(2) can insist on reducing the amount payable on closing by the included tax and remit it itself, a result consistent with paragraph 154(2)(a), under which consideration does not include tax payable by the recipient. Because the supply was taxable, the price the taxpayer received included an amount of HST equal to thirteen one hundred and thirteenths of the purchase price, collected in error.
That amount was not his to keep. The definition of net tax in subsection 225(1) includes all amounts that became collectible and all other amounts collected as or on account of tax, which captures amounts collected in error. Subsection 228(1) requires a person to calculate net tax and remit any positive amount, subsection 238(2) requires a non-registrant to file a return for each reporting period for which net tax is remittable, and subsection 245(1) makes the reporting period for a non-registrant the calendar month. The purchaser’s remedy, if it discovers the payment, is a rebate under section 261, and the Court explained that these provisions work together to minimize the risk that the fisc pays out a rebate of amounts collected in error without ever receiving them. The appeal therefore could not succeed on the collection point even though the taxpayer was not required to collect. The commercial consequence deserves emphasis: an HST inclusive price combined with an incorrect exemption certificate leaves the vendor holding tax it never intended to charge, cannot keep, and must remit out of sale proceeds that have already been spent.
How the issue reached the Court is itself instructive. After the taxpayer moved in February 2026 to amend his pleadings to argue that he did not have to collect HST, the Court raised the inadvertent collection question with counsel both on that motion and again in closing argument, observing that the Court is not bound by the pleadings or arguments of the parties and that its overriding obligation is to issue a decision based on the law. The practical lesson for counsel is not to assume that an unpleaded GST/HST issue will quietly disappear. Section 194, HST-inclusive pricing and inadvertent collection should be identified, pleaded and addressed in argument from the outset, because the Court may raise them whether or not either party has.
Practical Implications for Homeowners, Developers and Their Advisors
The first implication is evidentiary rather than legal. Nothing in Salehi changes the builder definition or the Happy Valley factors. What the decision demonstrates is how a court reconstructs intention from the documentary trail that a construction project inevitably leaves: permits and permit applications, utility accounts and hot water rental agreements, mortgage terms and their maturities, title directions, listing videos, agreements of purchase and sale and their conditions, warranty clauses and holdbacks, and address registrations with provincial and federal agencies. Every one of those documents was used against the taxpayer. A taxpayer who genuinely builds a family home generates a documentary record consistent with that purpose, and the absence of such a record is itself evidence.
The second implication concerns the spouse. In both projects, the Court was struck by the absence of the taxpayer’s wife from title, from financing and from the design and finishing decisions. Advisors should recognize that a spouse’s absence from the record is a material tax audit risk in its own right.
The third implication is that the CRA and the Court will look at the cluster of transactions around the property under CRA assessment, including transactions in the names of relatives. The Court refused to reason backwards from later sales when assessing the first project at Walder, which is a genuine point of principle in the taxpayer’s favour, but it had no difficulty treating the Poyntz purchases as the taxpayer’s own projects, because he negotiated them, signed under powers of attorney, applied for the permits and engaged the trades. Using a family member’s name does not change who is transacting.
The fourth implication is the most technically important, and it is the one most likely to catch well-advised parties by surprise. A vendor who signs a routine closing declaration certifying that a sale of real property is an exempt supply has, if that certification proves wrong, brought section 194 into play and will be deemed to have collected the tax.
Separately, the standard Ontario clause providing that HST is included in the purchase price if the sale is taxable operates exactly as written: a taxable sale means the vendor has collected tax as a matter of contract and must remit it under sections 225 and 228, even though the purchaser was a registrant and the collection was inadvertent. In a market where a great many teardown-and-rebuild sales close on exactly this paperwork, the exposure is not theoretical. Real estate closing counsel should stop treating the exemption declaration as routine conveyancing paper in teardown and rebuild files. In those files, the declaration is a tax opinion in miniature, and it should be tied to an actual GST/HST builder analysis rather than signed as a matter of course.
“The part of this decision that should worry vendors and their real estate counsel is not the builder analysis, which is well-travelled ground, but the interaction of the closing declaration with section 194 and the HST-inclusive pricing clause. A vendor can be entirely correct that a registered corporate purchaser was obliged to self-assess, and still lose, because the moment he certified the supply as exempt he was deemed to have collected the tax, and because his own agreement told him that any HST was already inside the price he banked. Real estate lawyers sign declarations like this every week without a GST/HST analysis behind them. In a teardown-and-rebuild fact pattern, that declaration should never be signed until a knowledgeable Canadian tax lawyer has formed a considered view on whether the vendor is a builder.” David J. Rotfleisch.
CRA Audit Risk: The Red Flags That Trigger an HST Builder Tax Audit
Builder tax assessments of this kind never begin with a court case. They begin with a CRA tax audit triggered by a small number of observable red flags, several of which were present throughout Salehi. A short gap between an occupancy permit and a listing date is one of the clearest tax audit triggers the CRA looks for, since it converts what looks like a residence into what looks like inventory. A mortgage structured for a term far shorter than the stated intention to live in the property is another, because financing records are among the first documents a CRA tax auditor requests. Address changes filed with government bodies before construction is complete are a third, and in this case the Court treated exactly this kind of registration as evidence of an intent to deceive rather than as a harmless administrative step.
The CRA’s tax audit approach in cases like this is document-led rather than testimony-led. Tax auditors typically request utility accounts, permit files, financing records and the agreement of purchase and sale first, and compare the dates on those documents against the taxpayer’s stated timeline before any interview takes place. That sequencing matters practically: by the time a taxpayer sits down with a tax auditor, the documentary case has usually already been made or lost.
If you have built a home, occupied it briefly and sold it, or helped a family member redevelop a property, the moment to get ahead of a tax audit is before the CRA opens a file. An experienced tax litigation lawyer for CRA disputes can review the documentary record early, and can advise on whether a voluntary disclosure is available while that option still exists.
The financial exposure in cases like this is not limited to the HST itself. What follows is tax audit risk guidance rather than part of the Court’s holding: no gross negligence penalty was assessed or decided in Salehi, and the decision says nothing about penalties. In other files, however, section 285 of the Excise Tax Act imposes a gross negligence penalty where a taxpayer knowingly, or under circumstances amounting to gross negligence, makes or participates in a false statement or omission in a return or in a document such as a closing declaration. Interest also runs under section 280 independently of any penalty, from the date the tax should have been remitted.
Strategic Takeaways for CRA Disputes Over New Home HST
Salehi is a useful map of where builder appeals are won and lost. On the law, the taxpayer’s best arguments were narrow, and the Court accepted one of them: the refusal to use later transactions to characterize the earliest project is a genuine limit on the frequency factor, and counsel should press it whenever the CRA assesses a first build by reference to a subsequent pattern. Beyond that, the taxpayer’s legal arguments were all attempts to escape an unfavourable factual finding, and none of them worked, because each depended on documents that the Court found had been created to produce an appearance rather than to record a reality.
After Salehi, the broad proposition drawn from Coates that a secondary intention to resell is irrelevant so long as the family actually lived in the house is distinctly unsafe. Salehi does not overrule Coates, and as a decision of the same court it could not. What Salehi and Caddell do is weaken the persuasive force of a broad reading of Coates, which is a difference that matters in argument but not in planning. Counsel advancing a subsection 191(5) argument should be prepared to prove enduring residential use with objective evidence of ordinary domestic life: continuous utility consumption from the date of occupancy, furniture and appliance purchases and deliveries, school and medical registrations, insurance on the home as a principal residence, mail redirection, and the ordinary services that a functioning household consumes. In Salehi, the absence of hot water for weeks or months did more damage than any argument the CRA made.
On litigation conduct, three points stand out. Do not tell the Court you will call a witness and then decline to call them, because the negative inference that follows may be more damaging than the evidence would have been. Where a related taxpayer has a parallel appeal and shares counsel, disclose that to the Court early rather than waiting, since late disclosure of a shared retainer invites exactly the scrutiny a taxpayer does not want. And treat electronic evidence with the same discipline as paper: preserve the source device and the underlying message, and resist the temptation to produce heavily redacted screenshots.
Finally, on the CRA assessment itself, arguments that the CRA assessed the wrong person or in the wrong capacity face a difficult statutory landscape. Subsection 267.1 makes a trustee liable for the trust’s obligations, and subsection 299(4) preserves a CRA assessment despite error or omission. A trust argument in a real property HST appeal must therefore be supported by contemporaneous documentation and real conduct consistent with the trust relationship, not by a declaration signed after the fact by the trustee alone.
Pro Tax Tips: Protecting a Genuine Family Build from a Builder Tax Assessment
If you intend to build a home for yourself and your family, decide that at the outset and then let the documents reflect it consistently. Put both spouses on title where the home is genuinely the family residence, since a spouse’s absence from title to a supposed dream home was one of the facts the Court found hardest to explain. Match the financing to the intention: a one-year mortgage on a house you plan to live in for a decade invites the inference that you planned to sell, whereas a conventional term mortgage is consistent with a long-term hold. If you own another home, address what will happen to it, because the Court in Salehi accepted that a taxpayer who stretched himself financially might simply have intended to sell the other property, and that reasoning can work in a taxpayer’s favour where the plan is documented.
Do not register an address change before the house exists. Registering with the Ministry of Transportation, the CRA, or anyone else that you live at a property where the footings have not yet passed inspection is not a harmless administrative convenience. In this case, it was found to be an untruthful registration whose purpose was to create an impression, and the CRA address change was found to have been designed to deceive the tax authority. That finding contaminated the taxpayer’s credibility on every other issue in the appeal, and credibility was ultimately what the case turned on.
Live in the house properly if you are going to rely on subsection 191(5) of the Excise Tax Act. Arrange the utilities from the day of occupancy, keep the bills, buy and furnish the rooms, and make sure the home functions as a home. If you offer the eventual purchaser a builder-style warranty with a holdback, understand that you are presenting yourself to the market as a builder and that a court will read the warranty that way, whatever your real estate lawyer suggested. If circumstances genuinely force an early sale, document the circumstance at the time it arises rather than explaining it years later in the witness box, and be prepared for the Court to test the explanation against your later conduct, which is precisely what defeated the marital difficulty explanation here.
Be careful with structures involving family members. If a parent is genuinely buying and funding a property, the parent should sign the offer, appear on title, be a party to the financing, and be able to show the source of the funds, and any trust arrangement should be documented at the time, signed by both parties, witnessed, and accurate in its references. A declaration signed months later by the child alone in two capacities, dated as of an earlier date, describing the child as a bare trustee while the argument at trial is that he was a trustee with duties, will not survive scrutiny. Remember too that retroactive tax planning is generally not permissible, and that even a valid trust will not move the liability to the beneficiary given subsection 267.1 of the Excise Tax Act.
Most practically of all, do not sign a closing declaration certifying that the sale of a newly built home is an exempt supply until a considered GST/HST analysis supports it. That single signature engages section 194 and deems you to have collected tax if the certification is wrong, and the specificity of the drafting will not save you. Read the HST clause in your agreement of purchase and sale with equal care, because a clause providing that HST is included in the price if the sale is taxable means that a taxable sale leaves you holding the tax fraction of the proceeds as an amount collected on account of tax. Where there is any doubt, obtain GST/HST advice from an experienced Canadian Tax lawyer before the transaction closes rather than defaulting to a position.
Charging and remitting is not automatically the safe answer, because subsection 221(2) generally means that a vendor selling real property to a registered purchaser is not required to collect at all. The safer course is to determine the correct treatment, align the agreement of purchase and sale and the closing certificate with that treatment, have the purchaser certify its registration number and its obligation to self-assess under subsection 228(4) where that applies, and make the allocation between price and tax unambiguous on the face of the documents.
If you have already closed a sale in these circumstances and did not report the tax, speak with an experienced Canadian tax lawyer promptly, because the voluntary disclosures program may be available. Relief is discretionary rather than automatic. Acceptance depends on the application being voluntary, on it being complete, on the reporting period being sufficiently overdue, and on payment of the estimated tax or acceptable arrangements to pay. Most importantly, the program is normally unavailable once the CRA has already commenced a tax audit or an investigation concerning the same information, so timing is decisive.
Frequently Asked Questions – About HST When You Build and Sell a Home
I built one house, lived in it and sold it. Does that automatically make me an HST builder?
No. The builder definition in section 123 of the Excise Tax Act carves individuals out where the construction is not carried out in the course of a business or an adventure in the nature of trade, and a single project can fall outside the definition. What Salehi shows is that the carve-out depends on the whole factual matrix assessed under the Happy Valley factors, including how long you owned the property after it became habitable, how the project was organized and financed, whether your spouse was involved, and why you sold. A genuine family build that is sold because of a real and documented change in circumstances can succeed. A build that is listed four days after the occupancy permit issues, on a property financed by a one-year mortgage, with the spouse off title and absent from the construction, will not.
How much time do I need to live in the home to rely on subsection 191(5)?
There is no bright-line period, and framing the question in terms of time is part of the problem. The statutory test asks whether the complex was used primarily as a place of residence and is not primarily used for any other purpose. Following Lacina, the occupation must possess an enduring quality, and after Salehi it is clear that occupation which coexists with a primary purpose of holding the property as inventory will not qualify no matter how many nights were spent there. The practical question an experienced Canadian tax lawyer will ask is not how long you stayed but whether the household genuinely functioned as your home while you were there.
Can I still rely on the Coates decision?
With considerable caution. Coates is an Informal Procedure decision, which means it is not binding precedent and cannot be cited as settled law. That does not make it worthless: an Informal Procedure decision can still be persuasive where its facts closely resemble yours and its reasoning is sound, and taxpayers do sometimes rely on such decisions successfully. In Salehi, however, the Court identified several reasons to distrust the broad reading of Coates. The frequently quoted passage omits the statutory word primarily, the facts relevant to primary use largely overlap with the motive analysis under Happy Valley, the decision has attracted no strong judicial support in fifteen years, and in Caddell the Court cautioned against reading it as permitting taxpayers to build homes with a primary aim of selling them provided they are willing to sojourn there first. Any subsection 191(5) argument built principally on Coates should be reassessed.
The purchaser of my property was a corporation registered for HST. Does that not put the obligation on the purchaser?
The obligation to collect does shift, but that is not the same as being free of liability. Subsection 221(2) relieves the vendor of the duty to collect where the recipient is registered, and subsection 228(4) requires the recipient to account for the tax. Salehi holds that a vendor in that position can nonetheless remain liable on two independent bases. If the vendor certified in writing that the supply was exempt, section 194 deems the vendor to have collected the tax. And if the agreement of purchase and sale provides that any applicable HST is included in the price, and the purchaser paid the full price without holding back the tax, the vendor has in fact collected an amount as or on account of tax and must report and remit it.
Does my closing declaration have to cite the specific exempting provision for section 194 to apply?
No, and the taxpayer’s argument to the contrary was expressly rejected. The Court held that section 194 requires only that the supply be certified as an exempt supply and that the exemption be one described in the listed provisions of Part I of Schedule V; the declaration need not recite which section applies. The Court observed that the French text is, if anything, clearer, and noted that the contrary reading would allow a vendor to escape the consequences of its own declaration by drafting it sloppily.
What happens to HST that I collected by mistake?
You must report it and remit it. The definition of net tax in subsection 225(1) captures all amounts that became collectible and all other amounts collected as or on account of tax, which includes amounts collected in error. Subsection 228(1) requires the positive net tax to be remitted, and a non-registrant must file a return under subsection 238(2) for each calendar month reporting period under subsection 245(1). The purchaser’s remedy is a rebate under section 261. As the Court explained, these provisions work together so that the fisc is not left paying a rebate for tax it never received.
I hold a property in trust for a family member. Can the CRA assess me for the HST?
Yes. Subsection 267.1(2) of the Excise Tax Act requires a trustee to satisfy every obligation imposed on the trust, and subsection 267.1(3) makes the trustee jointly and severally liable with the trust for amounts payable and remittable, while there is no equivalent provision imposing liability on the beneficiary. In Salehi, the Court found there was no trust at all, but held that even if there had been one, the taxpayer was the right person to assess, either as owner or as trustee. Subsection 299(4) also deems a CRA assessment valid despite error, defect or omission, so an argument that the assessment failed to specify the capacity in which you were assessed is unlikely to succeed on its own.
Will a declaration of trust signed after closing protect me?
Generally not, and it may do harm. The declaration in Salehi was signed in September but dated as of July, was signed by the taxpayer alone in both his personal capacity and as attorney for his mother, was not signed by the intended beneficiary or by any witness, omitted the father who was supposedly to live in the house, combined a trust declaration with an indemnity, described the taxpayer as a bare trustee when the position at trial was that he was a trustee with duties to perform, and referred to the wrong registration number. The Court described it as at best a retroactive declaration, and noted that retroactive arrangements of that sort are generally not permissible in tax. A trust must be documented when it is created, by the parties to it, and the surrounding conduct must be consistent with it.
What should I do if the CRA is auditing the sale of a home I built?
Engage an experienced Canadian tax lawyer before you respond in detail. The CRA tax auditor will assemble the same categories of documents that decided Salehi, including permits, utility accounts, financing records, listing materials, agreements of purchase and sale, warranty terms and address registrations, and early explanations that later prove inconsistent are extremely difficult to repair. If tax should have been reported and was not, ask whether the voluntary disclosures program is available before a tax audit begins. If a CRA assessment has already issued, the objection and appeal timelines are strict, and a Canadian tax litigation lawyer can advise on whether the CRA assessment is vulnerable on the facts or whether the better course is to negotiate a resolution.
My spouse is not on title to the home we built together. Does that put me at tax audit risk?
It can be, and it is worth addressing before you sell rather than after. In Salehi, the Court was struck in both projects by the absence of the taxpayer’s wife from title, from financing, and from the ordinary decisions a genuinely resident spouse makes, such as choosing appliances and finishes. Where a couple is truly building a family home, the non-titled spouse is usually deeply involved in exactly the decisions that leave a paper trail. If your spouse is off title for a legitimate reason, such as financing or credit considerations, make sure the record still shows their involvement in the build and the move-in, because an absent spouse combined with a short ownership period is one of the clearest signals the CRA and the courts have relied on to find that a project was never really a family home.
I am thinking about buying and redeveloping a property in a parent’s or adult child’s name while I handle the financing, permits and trades myself. Is that a safe way to avoid being treated as an HST builder?
No, and Salehi is a clear illustration of why. The CRA and the courts look past the name on title to who actually financed, organized and managed the project, and a family member’s name on the agreement of purchase and sale does not change who was carrying on the adventure in the nature of trade. If you want a parent or adult child to be the genuine purchaser, they need to behave like one: sign the offer, appear on title, be a party to the financing, and be able to show where the money came from. Anything less invites the same finding that defeated the nominee and trust arguments in Salehi.
If the CRA reassesses me as a builder, will I also face a gross negligence penalty?
It can. Section 285 of the Excise Tax Act imposes a penalty equal to the greater of $250 and 25 percent of the understated tax where a taxpayer knowingly, or under circumstances amounting to gross negligence, made or participated in a false statement or omission in a return or a document such as a closing declaration. Interest also runs under section 280 independently of any penalty. Salehi itself did not turn on a penalty issue, but a taxpayer who signs an inaccurate closing declaration or fails to report HST collected in error faces that additional exposure on top of the underlying tax. If the CRA assesses both tax and a penalty, object to them as distinct issues. The CRA bears the burden of establishing the facts that justify a gross negligence penalty, which is a heavier burden than the taxpayer faces on the underlying tax, so a penalty can sometimes be defeated even where the CRA assessment of tax stands.
DISCLAIMER: This article provides broad information. It is only accurate 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 as tax advice. 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.