CRA GST/HST Audits on New or Renovated Home Sales
The Canada Revenue Agency (CRA) has been scrutinizing property purchases and sales for years, but recent trends show an increased focus on GST/HST audits. These audits often accuse taxpayers of acting as “builders” when constructing or substantially renovating homes, claiming that the taxpayer should have charged GST/HST on the sale or when they moved in.
This aggressive stance by CRA can lead to significant financial consequences, even before a taxpayer files a formal notice of objection. A Toronto tax lawyer can help you respond early and minimize the risk of reassessment.
How CRA Conducts GST/HST Audits on Property Sales
A GST/HST property audit typically begins with a letter and questionnaire sent to the taxpayer. The questionnaire demands detailed information about the property, such as whether it was newly built or significantly renovated, if it was occupied, and the reasons for its sale. Taxpayers are also required to submit documentation about their original intentions and use of the home.
Newly constructed homes are generally subject to GST/HST, which is why developers charge GST/HST on new builds. However, the rules become more complex for individuals building or renovating homes for personal use.
CRA’s Claim: Are You a Builder?
For CRA to assess GST/HST on the sale of your property or when you move in, they must first classify you as a “builder” under Section 123 of the Excise Tax Act (ETA). The definition of a builder is broad and often leaves room for interpretation. However, with the right legal arguments, it is possible to challenge this classification and avoid a GST/HST assessment using the Schedule V, Part 1, Section 2 exemption. A Toronto tax lawyer can identify which provisions best apply to your circumstances and present them effectively to the CRA.
Fighting a Proposed GST/HST Assessment
If the CRA determines you to be a builder, they will assess GST/HST either when you move into the property, or on your property sale. However, there are strategies to challenge or reduce the proposed assessment:
- No Substantial Renovation: If you did not completed a substantial renovation, GST/HST may be avoided. The definition of substantial renovation is more than 90% of the home. You may use different calculations to try and prove your argument.
- Personal Use Exemption (Subsection 191(5) ETA or Schedule V, Part I, Section 3 ETA): If you constructed the home, lived in it as your primary residence, and later sold it, this exemption may apply. Proving that the home was your primary residence and you intended to occupy it for a significant period of time is crucial.
- Rebate (ITCs): If you cannot prove primary residence status, you may still reduce your liability by claiming a rebate. The rebate is for the GST/HST you paid in building the home and depending on the type of assessment CRA is proposing, when you sell it.
- Self-Assessment Rules (Paragraph 191(1)(e) ETA): Instead of GST/HST being based on the sale price, the self-assessment rules allow taxpayers to argue that GST/HST should be calculated on the fair market value of the home at the time construction was completed.
It is important to get in touch with a tax lawyer because CRA often issues assessments for the wrong reporting period or claims GST/HST is owing on a sale when it should be when a taxpayer moves into the property. These types of errors may be fatal to CRA’s argument and it’s important to have proper representation who can spot these issues.
Example: Self-Assessment in Action
Here’s a simplified example to illustrate how the self-assessment rules work:
- Michael buys a vacant lot and builds a home, completing construction in 2017.
- At the time of completion, the home’s fair market value is $1,300,000.
- Michael moves in immediately and lives in the home, but sells it in 2018 for $2,000,000 due to financial reasons.
If CRA deems Michael to be a builder and rejects his personal use exemption claim, the GST/HST assessment would typically be based on the $2,000,000 sale price. However, under the self-assessment rules, Michael can argue that GST/HST should be based on the $1,300,000 value at the time he moved in, reducing his tax liability significantly.
Rising Audits Require Expert Representation
GST/HST property audits are becoming increasingly common, especially for taxpayers who sell newly constructed or substantially renovated homes. These audits can lead to assessments in the hundreds of thousands of dollars, making it crucial to respond carefully.
We have helped numerous clients navigate these audits. The initial response to the CRA’s questionnaire is critical, as it sets the tone for your case. Consulting a Toronto tax lawyer before responding can help ensure you provide accurate and strategic information to protect your position and avoid unnecessary tax liability.
Kirshen Tax Law Can Help
At Kirshen Tax Law, we have the expertise to guide you through GST/HST property audits and defend your rights. Whether it’s proving you’re not a builder, claiming exemptions, or reducing assessments, we are here to help. Contact us for a free consultation with an experienced Toronto tax lawyer to learn how we can support you in resolving your CRA audit.
Jeff Kirshen BA, JD (CA), JD (US)
Tax Lawyer | Founder, Kirshen Tax Law
Disclaimer
The information provided in this blog is for general informational purposes only and does not constitute legal advice. Reading this blog does not create a lawyer-client relationship with Kirshen Tax Law or any of its lawyers. If you require legal advice specific to your situation, please consult a qualified tax lawyer. While we strive to keep our content accurate and up to date, laws and regulations may change. Kirshen Tax Law is not responsible for any actions taken based on the information in this blog.