Canada: GST/HST Tax Audit – Builders Of Residential Real Property And Self-Supply – A Canadian Tax Lawyer Analysis

Last Updated: September 7 2017
Article by David Rotfleisch

Introduction - Builders of Residential Real Property and Self-Supply

Building a new home, or renovating an old one, can be a stressful and overwhelming process. CRA can add to the stress by conducting a GST/HST Tax Audit. GST/HST has to be charged by the builder of a new home, and a substantial renovation can be considered new construction. In cases where a taxpayer has constructed a home (using a professional builder) and the Canada Revenue Agency("CRA") believes thatthe taxpayer also meets the definition of a builder and has therefore failed to account for, collect and remit GST/HST, the tax agency may issue a GST/HST assessment against the taxpayer based on the entire value of the home. Often, the GST/HST assessments include hefty penalties and interest, backdated to the original year of assessment.

The self-supply rules, as set out in section 191 of the Excise Tax Act,may be a complete response to the GST/HST tax audit, relieving the taxpayer of all the GST/HST assessed against him or her. This article briefly outlines the definition of a builder, and the self-supply rules that exempt the taxpayer from the obligation to pay GST/HST.

Meaning of Builder as Defined in the Excise Tax Act

The definition of builder is broad. Section 123 of the Excise Tax Act defines a builder as a person who, while the construction or substantial renovations of a residential property is underway, has an interest in the residential property or the land on which the property is situated. What is determinative as to whether a person meets this definition is the person's interest in the residential property or the land. This means that a person can meet the definition ofa builder merely by owning the lot and the building constructed on it, even if he or she has engaged another individual or company to carry out the construction.

Builder's obligation to remit GST/HST

Generally, a person who supplies goods or services to Canadian residents has an obligation to collect and remit GST/HST to CRA. A home builder is no different, and upon the sale or lease of a newly constructed house, condo or other residential property, he has a responsibility to account for, collect and remit GST/HST.However, if a builder meets the requirements of the self-supply rules, he does not have any GST/HST liability outstandingas a result of the sale or lease of that property.

Self Supply Rules as a complete response to a GST/HST Audit

The self-supply rules deem a builder to have accounted for, collected and remitted GST/HST when a particular property is sold or leased. Set out in section 191 of the Excise Tax Act, the rules outline situations where a builder is exempted from collecting and remitting GST/HST on a newly constructed or substantially renovated residential property. This means that the taxpayer, despite meeting the definition of a builder, has no obligation to remit GST/HST – the CRA considers the taxpayer to have met his or her obligation by virtue of the self-supply.

The self-supply rules apply when a builder uses the newly constructed or substantially renovated residential property for personal use. This means that the taxpayer uses the residential property, whether a new home or a condo, substantially for his personal use and enjoyment. It is important to note that the self-supply rules apply only if the taxpayer has not claimed any Input Tax Credits ("ITC") for the particular residential property. If the taxpayer has claimed ITCs, the self-supply rules do not apply.

GST/HST Audit / Audit Proposal for a Builder of Residential Real Property

A taxpayer who meets the definition of a builder, and has used a newly constructed home or condo for personal use, may still find himself being subjected to a GST/HST Audit.

A GST/HST audit proposal may be issued when the CRA believes that the taxpayer, despite meeting the definition of a builder, and having resided in the property, does not meet the requirements as set out in the self-supply rule. The taxpayer is therefore found to be in breach of his responsibility to account for, collect and remit GST/HST on the sale or lease of a newly constructed, or substantially renovated residential property.

A typical scenario is when a taxpayer has, on more than one occasion over the course of a few years, purchased a condo unit,resided therein briefly and has subsequently sold the property and moved into a second unit. He or she has then sold this second unit and moved into a third condo unit.

Another example is a taxpayer who has, on more than one occasion over the course of a short period of time, purchased an older home, has substantially renovated and resided in the property; and he has repeated this pattern a few times. From CRA's perspective, the individuals in the above examples, rather than simply changing their place of residence, have engaged in the business of selling real estate and are therefore obligated to pay GST/HST.

Once a GST/HST audit or audit proposal has been issued, the onus is on the taxpayer to respond within a reasonable time. In his or her response, a taxpayer can advance evidence to demonstrate that his factual scenario meets the requirements of the self-supply rule. If accepted by the CRA, the audit proposal is concluded and no assessment will be issued.

Whether a builder in the fact scenario outlined above meets the requirements of the self-supply rule is a factual determination. With some consistency, the courts have found certain factors, such as the taxpayer's profession, or length of the builder's residence in the property as determinative of a builder's intention to use a residential real property for his or her personal use. However, there are no hard and fast rules and a determination of the application of self-supply rule is best conducted by a Canadian tax lawyer well versed in the applicable case law.

Tax Tips for Builders of Residential Real Property facing a GST/HST Tax Audit: Self-supply Rules

Generally, the purpose of a tax audit is for the CRA to gather all the necessary information to check whether a taxpayer's GST/HST filings is accurate. To realize this goal, the CRA tax auditor has the power to ask for all the necessary documentation in making a final decision on your file. An important tax tip is to ensure that you keep a complete record of all the documents that support your position. As a builder of self use residential real property, it is critical that you keep a record of all the documents that establish your utilization of your house or condo for personal use. For example, keep a complete record of all your utility bills which demonstrate the length of your residence in the property, and the fact that you indeed lived on the premises. Newspaper or magazine subscriptions are also helpful. Ensure that all government offices have your updated address. It is important to keep in mind that a determination of a builder's eligibility for self-supply rule is highly fact specific, and there are different types of evidence which can demonstrate personal use of the residential property. Having all your utility bills may be insufficient in establishing your position. Another critical piece of advice is to respond to the GST/HST Tax Audit as soon as possible. In the absence of a response from the taxpayer, a tax assessment will be issued by the tax auditor. Even if the tax assessment is incorrect, the amount of GST/HST assessed by the tax auditor is considered a tax debt owing by the CRA, and collection action will generally ensue. It is less costly and more efficient for a taxpayer to seek advice from a Canadian tax lawyer quickly and respond to the audit within a reasonable time. The GST/HST tax rules are complex and the interplay of the statute and the case law presents many opportunities for the builders who are faced a GST/HST Tax Audit to seek relief from the imposed penalties and interest.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions