Despite repeated interest rate hikes over the past year, the real estate market in many major Canadian cities remains resilient, and construction of new housing continues to grow. As real estate property is typically a big ticket item, the Canada Revenue Agency (CRA) recently increased its audit activity on GST/HST self-supply rules on residential property. Residential builders who are unaware of the self-supply rules often face an unexpected GST/HST liability. Whether you’re a residential builder yourself or you count residential builders among your clients, this article offers a summary of important information about the self-supply rules.
Application of the self-supply rules
Pursuant to the self-supply rules under subsection 191(1) of the Excise Tax Act (the ETA), when the “builder” (defined in the next section) of a new or substantially renovated1 single-unit residential complex either rents out or is the first person to occupy the complex as their place of residence, the builder is deemed to have made and received a taxable supply of the complex and is, therefore, required to self-assess GST/HST on the fair market value of the residential property at that time.
A residential complex is a building or part of a building that includes one or more residential units. Where it is used primarily (generally meaning more than 50%) as a place of residence by an individual or a related individual, each of the following would be characterized as a “residential unit”: a detached or semi-detached house; a row house; a condominium; a mobile or floating home; an apartment or similar premises; a suite or room in a hotel, motel, inn, or boarding/lodging house; and a suite or room in a residence for students, seniors, individuals with a disability, or other individuals.2
The self-supply rules are designed to put builders—who could otherwise construct or substantially renovate a residential complex to be used as their rental or personal-use property without paying GST/HST on the fair market value of the property—on a level footing with others who would have to pay GST/HST on the fair market value of the same residential property if acquiring such property from a builder.
Since the self-supply rules only apply to builders, it is important to note that the definition of a “builder” for GST/HST purposes differs substantially from the colloquial meaning of the term. In subsection 123(1) of the ETA, a builder is defined as a person who has an interest in real property and who either carries on or engages someone else to carry on the construction or substantial renovation of a property in the course of a business or an adventure or concern in the nature of trade. In other words, if a person builds a residential complex for their own use, that person is not a “builder” for the purposes of GST/HST.
Also in subsection 123(1) of the ETA, the term “business” is defined to include “a profession, calling, trade, manufacture or undertaking of any kind whatever, whether the activity or undertaking is engaged in for profit, and any activity engaged in on a regular or continuous basis that involves the supply of property by way of lease, licence or similar arrangement, but does not include an office or employment.”
Interestingly, although the phrase “an adventure or concern in the nature of trade” is not defined in the ETA, it has been considered in numerous income tax cases. In the precedent-setting case Nowoczin v. The Queen, 2007 TCC 275, the Deputy Judge D.W. Rowe considered whether the taxpayer was engaged in an adventure or concern in the nature of trade by applying six tests set forth by Judge J. Rouleau, in another precedent-setting court case, Happy Valley Farms Ltd. v. The Queen, (1986) 7 F.T.R. 3 (TD). These six tests consider:
- The nature of the property sold;
- The length of the ownership period;
- The frequency or number of other similar transactions conducted by the taxpayer;
- The work performed on or in connection with the property;
- The circumstances giving rise to the sale; and
- The taxpayer’s motive.
While all of the above factors have been considered by the courts over the years, the last factor—the question of motive—is the one that has been explored most.
Thus, to re-emphasize, if an individual who builds or substantially renovates a home for their own account—that is, not for a business or an adventure or concern in the nature of trade—the individual would not be considered a builder according to the ETA and, therefore, would not have to self-assess GST/HST on a residential property under the self-supply rules.
Exceptions to the self-supply rules
- Exception for personal use by builder
Even if an individual does meet the definition of a builder, they may still be exempt from the self-supply rules under the “personal-use exception” in accordance with subsection 191(5) of the ETA, provided all of the following criteria are met:
- The builder is an individual;
- At any time after the construction or renovation of the complex or addition is substantially completed, the complex is used primarily (generally meaning 50% or more) as a place of residence for the builder, an individual related to the builder, or a former spouse or common-law partner of the builder;
- The complex is not used primarily for any other purpose between the time the construction or renovation is substantially completed and the time it is used primarily as the builder’s place of residence; and
- The builder has not claimed an input tax credit for the acquisition of the complex or for an improvement made to the complex.
In a previous court case, Coates v. The Queen, 2011 TCC 74, Justice Robert J. Hogan looked at the application of subsection 191(5) of the ETA and commented that the personal-use exception of the self-supply rules involves a simple factual determination of whether the builder has met all conditions required for the exception provision. The court also stated that a secondary intention to resell the property at a later date is irrelevant to the determination of the exception’s application, as the exception in subsection 191(5) does not require that the property be used as a permanent, primary, or principal residence. Instead, the provision requires that the individual builder use the property primarily as a place of residence.
- Exception for student residence
Under subsection 191(6) of the ETA, the self-supply rules do not apply to student housing, provided that the builder is a university, public college, or school authority and the residential complex is newly constructed or substantially renovated primarily for the purpose of providing a place of residence for students attending the university, college, or school.
- Exception for communal organizations
If the construction or substantial renovation of a residential complex is carried out exclusively for providing a residence for members of a community, society, or body by a builder who is defined as a communal organization in section 143 of the Income Tax Act, the self-supply rules would not apply pursuant to subsection 191(6.1) of the ETA.
The application of GST/HST to real estate property transactions can be complex, and the determination of whether a person meets the definition of a builder is very fact-specific. Thus, the GST/HST self-supply rules may catch many unwary builders by surprise.
Accordingly, it is important for taxpayers to understand: a) whether they meet the definition of “builder” for GST/HST purposes and b) whether they qualify for an exemption from the self-supply rules. And it is critical that they keep a good record of documents supporting their use of the residential complex as their own place of residence in the event of a GST/HST audit.
Lawrence Tam is a tax partner with Crowe MacKay LLP in Vancouver, where he specializes in estate and trust planning, tax compliance, and planning for owner-managed businesses and high-net-worth individuals. Fluent in both Mandarin and Cantonese, Lawrence works with many clients based in Asia.
1 The CRA considers a substantial renovation to have taken place if 90% or more of the interior of a building, with the exception of certain structural components (e.g., the foundation, external walls, interior supporting walls, roof, floors, and staircases), has been removed or replaced.
2 A residential complex does not include a hotel or motel room, a boarding house, an inn, or any similar premises if all or substantially all (i.e., 90% or more) of the building is supplied under leases for periods of less than 60 days of continuous occupancy.