It is crucial to understand whether a real estate transaction in Canada is subject to the Goods and Services Tax (GST) and Harmonized Sales Tax (HST). For those dealing with residential complexes, certain sales may be exempt from GST/HST under specific conditions outlined in the Excise Tax Act (ETA).
Canada Revenue Agency (CRA) audits targeting individuals who build and sell homes are on the rise. CRA will usually claim you are a builder, and you should have charged GST/HST on the sale of the home or when you moved in (self-supply). They will then argue that you do not meet any of the available exemptions.
In this blog, we will review the particulars of Schedule V, Part I, Section 2 and Section 3, to provide clarity on these exemptions.
Schedule V, Part I, Section 2: Non-Builder Sales
Section 2 of Schedule V, Part I addresses situations where a residential complex or an interest in such a complex is sold by a person who is not the builder. To qualify for the GST/HST exemption under this section, the following conditions must be met:
- Non-Builder Status: The seller must not be the builder of the residential complex or any substantial addition to it.
- No Input Tax Credit Claimed: The seller should not have claimed an input tax credit for the last acquisition or any improvements made to the complex after its acquisition.
- Recipient’s Registration: If the recipient (buyer) is registered under Subdivision D of Division V of Part IX of the Act:
- The recipient must have made a prior taxable supply of the complex or interest to the seller or a related person.
- The particular supply must be made within one year after the day the prior recipient acquired the interest or possession of the complex.
- The complex must not have been used as a place of residence or lodging after its construction or substantial renovation.
- The supply must be pursuant to a right or obligation under the agreement for the prior supply.
- The recipient and seller must jointly elect this exemption in a prescribed form and file it with the Minister along with the recipient’s tax return.
The term builder is not defined in the law. Tax Court of Canada caselaw and Canada Revenue Agency (CRA) publications have various factors that are reviewed when coming to a decision. In a CRA audit, being defined as a builder means you are not eligible for the Section 2 exemption.
Schedule V, Part I, Section 3: Builder Sales
If Canada Revenue Agency defines you as a builder, Section 3 provides an exemption for sales by individuals who are builders of the residential complex under certain conditions:
- Builder’s Use: After the construction or substantial renovation is completed, the complex must be used primarily as a residence by the builder, a related individual, or a former spouse/common-law partner.
- Primary Use: The complex must not be used primarily for any other purpose between the completion of construction or renovation and the time it is used as a residence.
- No Input Tax Credit Claimed: The builder must not have claimed an input tax credit for the acquisition or improvement of the real property included in the complex after the last acquisition.
It is important to note that this exemption is for the sale of a home. If CRA audits an individual claiming they are a builder, and then states they have made a self-supply, the defense available is different.
Self-Supply Rule
If you are a builder and you move into the home, subsection 191(1) of the ETA states that you must charge GST/HST on the fair market value of the home. This is known as the self-supply rule.
There is an exemption to the self-supply rule which is similar to Section 3 above. It is found in section 191(5) of the ETA. This exemption is the usual defense put forward by individuals when being audited by CRA. Please see our other blog for more information on this specific rule.
Key Takeaways
Understanding these exemptions is vital for sellers of residential complexes. Especially with the number of Canada Revenue Agency audit’s being initiated in circumstances where individuals build homes and sell them.
Engaging a Toronto tax lawyer for your audit can mean the difference between paying or not paying GST/HST on the sale of a home. Usually, this amount is hundreds of thousands of dollars.
For more information or assistance with your specific case, you can contact us here.
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Disclaimer
Each article/blog post is only meant to provide general information. It is posted on a specific date. Laws and rules change. Please know that it may be out of date. It is not meant to provide legal advice, and it does not provide legal advice. It cannot be relied on. Every tax situation is unique, and that may mean situations differ from this article/blog. If you have legal questions, please consult a lawyer.