When selling a property, difficult rules and exceptions or exemptions may apply. Among these rules lies Subsection 191(5) of the Excise Tax Act (ETA), which introduces an exception that can significantly impact builders of residential complexes or additions. Normally, when a builder moves into a home, they must self-assess GST/HST. This means that they take the fair market value of the home and pay GST/HST to the Canada Revenue Agency (CRA) based on the sale of the home. However, Subsection 191(5) of the ETA provides an exception to this self-assessment, personal use or self-supply rule.
Unpacking Subsection 191(5) of the ETA
The self-supply or personal use exception comes into play for builders of residential complexes or additions under specific circumstances:
- The builder must be an individual.
- Following construction or renovation, the property must primarily serve as the residence for the builder, a related individual, or a former spouse or common-law partner of the builder.
- The property cannot primarily serve any other purpose during the occupancy period.
- The builder cannot have claimed an input tax credit related to the property’s acquisition or improvement.
Simplifying the Personal-Use or Self-Supply Exception
Contrary to its legal framework, the personal-use exception isn’t as complex as it may seem. If a builder utilizes the property primarily as their residence, excluding other purposes, subsection 191(5) of the ETA applies, and they do not have to self-assess GST/HST.
Clarifying Misconceptions
It’s essential to dispel any misconceptions surrounding this exception. Contrary to assumptions, the criteria outlined in the Happy Valley case don’t influence the applicability of Subsection 191(5). It is irrelevant whether the builder is building the property in the course of a business. Subsection 191(5) necessitates a distinct evaluation. It centers on factual determinations regarding the property’s residential use post-construction, disregarding secondary intentions like future resale. The exception also doesn’t hinge on the builder’s sole intent during construction. Even if the builder harbors intentions of resale, the exception applies as long as the property primarily serves as their residence.
CRA Audit
For taxpayers navigating property audits, understanding the personal-use exception is paramount. CRA will argue:
- The individual is a builder and GST/HST should have been charged on the sale of the home; or
- The individual is a builder and should have self-assessed GST/HST when moving into the home.
For both of these arguments, CRA will claim that the property did not serve primarily as the residence for the individual, or that the individual was only living in the property temporarily. Further, CRA will assert that the property is inventory, which makes it part of a business, rather than a personal home.
Taxpayers will need to prove that they are:
- Not builders for purposes of the ETA; and/or
- They qualify under the subsection 191(5) personal-use or self-supply exception for GST/HST.
Conclusion
Subsection 191(5) of the ETA offers relief for builders navigating residential property sales, provided they meet specific residency criteria. By unraveling the complexities of this exception, taxpayers can navigate property transactions with clarity and confidence.
If you are being audited for a property sale, you can contact us here for a free consultation.
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.