Swift v. The Queen, 2020 TCC 115 & Coates v. The Queen, 2011 TCC 74 & GST/HST
In Ontario, for example, many taxpayers bought and/or renovated homes consecutively during the housing upturn. Consequently, it has been common for Canada Revenue Agency (“CRA”) to target the consecutive purchase and sale of 3 or 4 homes by a taxpayer. Why? Well, in a lot of cases the taxpayer claimed a capital gain on the sale of the home(s) which means only 50% of the profit (the capital gain) is taxed. Accordingly, CRA auditors have focused on recharacterizing the capital gains as business income (100% is taxed) and applying GST/HST. Ultimately, the goal is to increase tax recovered.
Due to Canada’s real estate market at the time, many taxpayers purchased and sold multiple properties for profit. However, profit is not the only reason a taxpayer might buy and sell properties consecutively. Purchases and sales can occur on account of life events. For instance, a person may sell their condo to move into a home purchased with their fiancé. The relationship subsequently breaks down, the home is sold, and another condo is purchased. CRA has targeted similar transaction patterns and assumed the taxpayer is a “builder” pursuant to the Excise Tax Act, RSC , 1985, c. E-15 (“ETA”). Therefore, according to CRA, the person should have reported business income and collected GST/HST for each sale pursuant to ETA subsection 191(1) which requires the self-assessment and remittance of GST/HST.
Self-Supply / Personal-Use Exception under Subsection 191(5) of the ETA
We routinely represent taxpayers during the respective audits and appeals if necessary. And one of the first issues we consider is whether or not the taxpayer resided in the property. If so, they may be eligible for a GST/HST exemption pursuant to subsection 191(5) of the ETA.
A key case regarding the self-supply or personal-use exception is Swift v. The Queen, 2020 TCC 115, a Tax Court of Canada ruling that examines when self‑supply GST/HST applies to the construction and sale of a personalized home.
The Appellant, a professional builder, operating through a corporation, personally purchased a vacant residential lot in 2009 and contracted the corporation to construct a custom home, which he and his family moved into in 2010. Approximately 3.5 years later, facing financial difficulties, he sold the residence. The CRA assessed him personally for GST/HST under the self‑supply rules, contending he was a “builder” as defined in subsection 123(1) of the ETA and couldn’t claim the personal‑use exemption as per ETA subsection 191(5).
The Tax Court disagreed with CRA and determined that the Appellant was not a builder pursuant to the factors from the decision in Happy Valley Farms Ltd. v. The Queen, 1986 CanLII 7434 (FC).
However, according to the Tax Court, the subsection 191(5) self-supply or personal-use exception would have applied if the appellant was held to have been responsible for self-assessing GST/HST.
The Self-Supply/Personal-Use Exception Test from Coates v. The Queen, 2011 TCC 74
According to the TCC, at para. 61 of Swift, referring to paras. 13 to 15 of the decision in Coates v. The Queen, 2011 TCC 74:
It is important to note that the tests outlined in the Happy Valley Farms case have no bearing on the determination as to whether or not the exception in subsection 191(5) applies. I make this comment because counsel for the Respondent relies on a number of cases that, I believe, fail to acknowledge this.
The wording of subsection 191(5) makes it clear that a different test must be applied. That provision requires that the property actually be used first by the individual (who is a builder as defined) as a place of residence. That involves a simple factual determination as to whether or not the property was used as a family home after it was substantially completed. A secondary intention to resell the property at a later date is irrelevant to the determination as to whether or not the exception applies.
By definition, an individual is a builder only if the property was built in the course of a business or an adventure in the nature of trade. If the home was constructed by the individual purely for personal reasons, the “self-supply” rule does not apply in the first instance. The exception only comes into play after an individual has been found to be a builder. Therefore, the exception cannot be interpreted as requiring that the property have been built only for purely personal reasons. This means that an individual can benefit from the exception even if he has the secondary intention, at the time of its construction, of reselling the property, provided he actually uses it as a place of residence after the construction is completed.
SpenceDrake Tax Law – Tax Lawyers
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.