In March 2025, the Tax Court of Canada delivered its judgment on Ayoub v The King, 2025 TCC 48, related to the assessment by the Canada Revenue Agency (CRA) on the taxpayer, Michael Ayoub, for director's liability under subsection 323(1) of the Excise Tax Act. The discussion in the case extends beyond the director's liability and includes the intertwining of the self-supply rule for home builders under subsection 191(1) and the exempt supplies of real properties under Part I of Schedule V of the Excise Tax Act.
Background – A computer programmer turned home builder
Michael Ayoub, the taxpayer, was a computer programmer by training. He initially incorporated 6545009 Canada Inc. (the "Corporation") as a personal services corporation for his IT work. In 2012, the Corporation started to build homes for resale. Unfortunately, due to a market downturn in 2014-2015, it was unable to sell the houses it had built and ran into financial troubles. In 2015, the Corporation was forced to rent out two of its properties, which were later sold in 2017. On various occasions, to meet the cash flow requirements, Michael advanced capital as a shareholder loan to the Corporation for a total of $446,000.
Michael was not aware of the self-supply rule under subsection 191(1) of the Excise Tax Act, triggered by the Corporation's renting out the two properties, and thus failed to remit the GST/HST from the deemed sales. As a result, the Corporation was assessed for net tax owing and Michael was assessed for director's liability under subsection 323(1) of the Excise Tax Act.
Self-supply rule applies regardless of the exempt supply provision
Normally, when a builder sells a residential property, the builder must collect GST/HST from the sale and remit the net tax to the CRA. The builder can claim input tax credits (ITC) for the GST/HST it already paid on the expenses related to the building of the home.
However, when the builder, instead of selling, rents out the property or personally occupies the property, the builder is deemed to have sold it for a proceed at fair market value and to have collected the GST/HST on the deemed sale. The deemed collected GST/HST must be included in the net tax and remitted to the CRA. This is provided in section 191 of the Excise Tax Act and is known as the self-supply rule. The builder can claim input tax credits on GST/HST paid to suppliers, to reduce the net tax to be remitted.
To avoid double taxation, the subsequent sale of a self-supplied property is an exempt supply per section 4 (for single-unit residential property) or section 5 (for multiple-unit residential property) of Part I of Schedule V of the Excise Tax Act.
The experienced Canadian tax litigation lawyer representing Michael argued that because the GST/HST was not collected from the home buyer due to the exempt supply provision, the Corporation could not possibly remit GST/HST imposed by the self-supply rule to the CRA.
The Tax Court rejected this argument, holding that the exempt supply provision is connected to the self-supply rule, but the self-supply rule operates regardless of the later application of the exempt supply provision. At the time of the occupation of the residential property, the builder is required to remit net tax to the CRA, not pending a later sale.
Director's liability and priority of tax obligations
Pursuant to subsection 323(1) of the Excise Tax Act, where a corporation fails to remit net tax, the directors of the corporation at the time are jointly and severally liable together with the corporation to pay the taxes as well as interest and penalties. The directors are afforded the due diligence defence provided in subsection 323(3).
The Tax Court reiterated the due diligence standard is an objective "reasonably prudent person" standard. In order to establish due diligence, the director must be "specifically concerned with the tax remittances and proactively took steps to prevent the failure of the corporation to make those remittances." In this case, a director, who knew full well that the corporation was under financial strain, should have taken precaution by consulting with accountants and experienced Canadian tax lawyers before renting the properties out. Michael failed in his duty as the director by not informing himself of the Corporation's tax obligations.
The knowledgeable Canadian tax lawyer representing Michael relied on the fact that Michael personally advanced $446,000 to the Corporation and argued that Michael went "above and beyond" the degree of care, diligence and skill required by subsection 323(3). The Tax Court disagreed.
The money advanced by Michael, as well as the proceeds from the sale of other properties, was all used to pay off various expenses of the Corporation rather than to remit taxes. The Tax Court emphasized that paying taxes must take priority and equated the Corporation's actions with financing its business activities with Crown monies. This again showed Michael's lack of due diligence by not concerning with the tax remittances as required.
Pro Tax Tip – Builder must remit GST/HST when self-supplying, or the director will be responsible
Taking everything together, the Tax Court ruled that the Corporation must remit GST/HST on the deemed sales when it rented the properties out. Michael, despite having injected his own capital to keep the Corporation afloat, fell short of his duty of care to the Corporation as a director and must be held liable.
This case affirms the operation of the self-supply rule regardless of the exempt supply provision. When a builder of a residential property rents the property out or personally occupies the property, it is deemed to have sold the property, a taxable supply, to itself at fair market value. It is also deemed to have collected GST/HST on the deemed sale and is liable for the remittances. The exemption from GST/HST for the subsequent sale of the property to a third party has no bearing on the remitting obligation at the time of self-supplying.
By not inquiring about the tax obligations of the corporation before making decisions, the director failed the due diligence requirement and was jointly and severally liable for the unremitted GST/HST. Advance of one's own money is not a defence if the money does not go towards payment of the tax debts, which must take priority. Consultation with a top Canadian tax lawyer before undertaking any of these transactions would have saved significant taxes.
FAQ
If the sale of a self-supplied property is an exempt supply, how can the builder claim input tax credits (ITC) for the building expenses?
Generally, GST/HST registrants cannot claim input tax credits to recover the GST/HST paid or payable on property and services acquired to make exempt supplies. However, a self-supplied property was deemed taxable supply when it became self-supplied, meaning the builder can claim input tax credits at that time, but not later when the property is sold to a third party. The rules of self-supply and exemptions are complex. Builders are recommended to consult with experienced Canadian tax lawyers before making changes to the use of the properties.
A director's job is to manage the business. How can a director be expected to know all the legal and accounting matters?
A director's job is also to ensure the corporation complies with the laws. While it is true that a director cannot be expected to know all the legal and accounting matters, the director is expected to seek advice from experts, get acquainted with potential issues and proactively take steps to prevent any pitfalls. When it comes to tax, directors should absolutely consult with experienced Canadian tax lawyers.