The Canada Revenue Agency (“CRA”) has been reviewing property purchases and sales for years. More recently, they have started GST/HST audits which accuse taxpayers of building their own homes and selling them as part of a business. They claim taxpayers are builders and not subject to any exemption from charging GST/HST on the eventual sale of the home. They do this from a GST/HST perspective rather than an income tax one because GST/HST is collectible even if a notice of objection is filed following an audit assessment.
GST/HST Audits on Property Sales
A GST/HST property sale audit is very similar to an income tax property audit. A letter is sent to the taxpayer along with a questionnaire. The questionnaire asks the taxpayer specific information about buying a home, tearing it down, and rebuilding it, or making substantial renovations. It also asks for documentation, and information about the intention relating to the construction, whether the home was lived in, and reasons for the sale of the home.
New construction is normally subject to GST/HST. That is why developers always charge GST/HST on new builds. These rules become more complex when an individual is building a home for their personal use. We will expand on this below.
GST/HST Audits on Property Sales – The CRA Says I am a Builder?
For the CRA to claim you should have charged GST/HST on the sale of a property, they must first state that you are a builder. This comes from Section 123 of the Excise Tax Act (“ETA”).
The definition for builder is broad, and it can be difficult to fight. However, it is certainly possible. If you are able to prove you are not a builder, the CRA will not issue you a GST/HST assessment.
GST/HST Audits on Property Sales – How Can I Fight It?
If the CRA determines you to be a builder, they will want to assess you for GST/HST. However, Subsection 191(5) of the ETA provides an exemption that could be used to fight off any potential assessment. If an individual builds a home, occupies it as their primary residence, and then sells it, the exemption states the taxpayer does not have to charge GST/HST on the sale price. There are very specific rules that must be met in order to qualify for this exemption, and you need to be able to prove you meet them.
This is the main argument against the vast majority of audits where CRA attempts to deem taxpayers builders, and then claim that they should have charged GST/HST on the sale price.
GST/HST Audits on Property Sales – Input Tax Credits
If you are unable to prove that you occupied the home as your primary residence, there are other ways to try and lower the potential assessment.
Any GST/HST that was paid for the construction, or sale of the property may be used as a credit against the amount you could owe.
So, if you paid $100,000 in GST/HST to construct and sell the property, this $100,000 may be used to offset the amount of money the CRA asks you to pay to them.
GST/HST Audits on Property Sales – Self-Assessment Rules
Another way to try and lower the amount the CRA claims you owe is by arguing that the GST/HST assessment should not be based on the sale price, but rather the fair market value of the home when construction was completed.
These are known as the self-assessment rules. These rules are very complex but can be used to lower the assessment amount.
Here is an example to make it easy:
Tom buys a vacant lot and finishes constructing his home in mid-2017;
The home is worth $1,300,000 when construction finishes;
Tom moves in, but financial circumstances lead to him moving out and selling in mid 2018;
If CRA deems Tom a builder, and does not accept the Section 191(5) exemption argument, the self- assessment rules may be used to lower the potential amount he will owe;
Tom sold the home for $2,000,000;
CRA will want GST/HST based on the $2,000,000 sale price;
However, the self-assessment rules can be used to argue that the GST/HST amount should be based on the $1,300,000 value when construction was completed.
Conclusion
GST/HST Property Audits have been on the rise. The CRA seems to be auditing everyone, and anyone who builds a home and sells it within a few years. Here at SpenceDrake Tax Law we have the experience, and expertise to assist. We have helped many taxpayers fight these audits and we can help you too.
Your first response to the questionnaire is important. It lays the foundation for your entire argument. Be sure to consult with a lawyer before you respond so that you put yourself in the best position to win this audit. Give us a call for a free consultation so we can explain how we can help.
Jeff Kirshen, BA, JD(US), JD(CDN)
Partner & Tax Lawyer
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/bog. If you have legal questions, please consult a lawyer.