Fadali v. His Majesty the King, 2026 TCC 86 & Paragraph 123(1)(f) of the Excise Tax Act
The Tax Court of Canada’s recent decision in Fadali v. His Majesty the King, 2026 TCC 86 [Fadali] illustrates the importance of paragraph 123(1)(f) of the Excise Tax Act, R.S.C., 1985, c. E-15, which provides an exception to the definition of “builder.”
The Definition of “Builder”
Pursuant to subsection 123(1) of the Excise Tax Act, a “builder” is required to charge, collect and remit GST/HST on the respective property sale. The definition is deliberately broad. Among other things, it can include an individual who has an interest in real property and constructs or substantially renovates a residential complex or engages someone to do so. In part, according to the Excise Tax Act, subsection 123(1):
“builder” of a residential complex or of an addition to a multiple unit residential complex means a person who
(a) at a time when the person has an interest in the real property on which the complex is situated, carries on or engages another person to carry on for the person
(i) …
(ii) in any other case, construction or substantial renovation of the complex…
The Exception in Paragraph 123(1)(f) of the Excise Tax Act
Paragraph 123(1)(f) narrows the definition of “builder” for individuals where the construction or substantial renovation is not in the course of a business or an adventure or concern in the nature of trade. A “builder” does not include:
(f) an individual described by paragraph (a), (b) or (d) who
(i) carries on the construction or substantial renovation,
(ii) engages another person to carry on the construction or substantial renovation for the individual, or
(iii) acquires the complex or interest in it,
otherwise than in the course of a business or an adventure or concern in the nature of trade…
Paragraph 123(1)(f) Explained
Paragraph 123(1)(f) narrows the “builder” definition for individuals where the construction or substantial renovation is not in the course of a business or an adventure or concern in the nature of trade. The exception in paragraph 123(1)(f) is important for someone building a home for personal use. Without it, an individual could potentially fall within the builder definition simply by constructing or substantially renovating their own home.
The difficulty is that the exception turns on the nature of the undertaking. It is not enough to characterize the property as a personal residence. If the construction or substantial renovation is determined to be in the course of a business or an adventure or concern in the nature of trade, the exception does not apply.
In many cases Canada Revenue Agency (“CRA”) auditors will assume the construction or substantial renovation indicates a primary intention to profit rather than permanently reside. Accordingly, proving residence or the intention to reside is key.
The Fadali Decision
Mr. Fadali was involved in the severance of a Toronto property, the demolition of the existing house and the construction of two new homes. He said that one of the new homes was intended to be his personal residence. However, he did not occupy the home and it was instead listed for sale shortly after construction. It was ultimately sold for $4.425 million.
The CRA assessed GST/HST on the sale, taking the position that Mr. Fadali was a builder as per subsection 123(1) of the Excise Tax Act. The Tax Court agreed. A significant part of the analysis was whether the paragraph 123(1)(f) exception applied. However, the Court concluded that the construction was undertaken in the course of an adventure or concern in the nature of trade. Therefore, the sale was on account of business and not capital.
In reaching that conclusion, the Court considered the circumstances as a whole. The fact that the taxpayer said he intended to live in the home was relevant, but it was not determinative. The fact that the home was never occupied and was put on the market shortly after construction was particularly important, along with the broader circumstances of the development.
Conclusion
Paragraph 123(1)(f) provides important protection where the construction or substantial renovation is genuinely for personal purposes. However, if CRA assumes that the construction or substantial renovation was undertaken in the course of a business or adventure or concern in the nature of trade the exception does not apply. Therefore, an appeal of the respective re/assessment may be necessary.
What the Fadali decision does demonstrate is that the taxpayer’s stated intention will be tested against the surrounding facts. For individuals undertaking construction or substantial renovation, the GST/HST consequences—and the potential application of paragraph 123(1)(f)—are therefore issues worth considering before the project gets underway.
SpenceDrake Tax Law – Tax Lawyers
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