Introduction – The GST/HST Self-Supply Rules
Residential builders sometimes face unexpected GST/HST liability due to the self-supply rules in Canada’s Excise Tax Act. In effect, the self-supply rules deem a builder to have sold to itself a residential property at fair market value if the builder constructed or substantially renovated that property and then either rented it out or personally occupied it.
These rules aim to level the field between builders, who could otherwise construct or renovate a rental or personal-use property without incurring GST/HST for the value added to the property, and non-builders, who would need to purchase the completed property from a builder and thereby pay GST/HST to achieve the same result.
As this rationale suggests, the self-supply rules aren’t aimed at those who built or renovated a residential property for a non-business purpose. Builders by trade would enjoy the tax advantage because the GST/HST system disregards the commercial supplier while taxing the ultimate consumer. Registered builders, for instance, recoup the GST/HST they paid for business expenses by claiming input tax credits (ITCs). Consequently, the self-supply rules don’t apply to property owners who either do not or cannot claim ITCs. Moreover, the self-supply rules only apply to a “builder.” The Excise Tax Act essentially defines a builder as a person who builds or renovates a property (or engages another to build or renovate a property) in which the person has an interest. But a builder excludes those who don’t act as such in the course of a business or an adventure in the nature of trade.
The Excise Tax Act offers three major exceptions to the self-supply rules: (1) the personal-residence exception; (2) the student-residence exception; and (3) the communal-organizations exception. The Act also provides an election for employee or contractor housing at a remote work site.
This article provides an overview of the self-supply rules, the three exceptions, and the remote-work-site election.
Subsection 191(1): Taxable Self-Supply Upon Occupancy or Lease of a Constructed or Substantially Renovated Residential Property
The basic self-supply rules apply when a builder either personally occupies or rents out a residential property—i.e., a residential home, condo unit, or apartment building—after having built or substantially renovated that property. If either rule applies, the builder is deemed to have sold and repurchased the property at its fair market value. The builder must therefore include the GST/HST payable on the fair market value of the built or renovated property when computing his or her net tax payable.
The self-supply-by-way-of-lease rule applies when a builder leases or licences the built or renovated property for use as an individual’s place of residence. As a result, the builder must account for the GST/HST payable on the property’s fair market value. If the property happens to be an entire apartment building, the builder must account for the GST/HST payable when the first unit is rented out.
The self-supply-by-way-of-personal-residence rule applies when a builder occupies the built or renovated property for use as his or her own personal residence. Again, once the rule is triggered, the builder must account for the GST/HST payable on the property’s fair market value. (This rule may not apply, however, if the builder didn’t claim input tax credits for purchasing, building, or renovating the property. The personal-residence exception is discussed in more detail below.)
Recall, the self-supply rules only apply to a builder, which excludes those who renovate or construct a property for a non-business purpose. So, if you hire a builder to substantially renovate your personal residence, neither the self-supply rules nor the self-supply exceptions are relevant to you. The same is true if you purchase a newly built home as your personal residence. You’ll pay GST/HST upon purchase in the same way as other consumer purchases. (You may be able to claim a GST/HST New Housing Rebate for a new-home purchase or a substantial renovation.)
Subsection 191(5): The Personal-Residence Exception
As discussed above, the self-supply rules aim to level the playing field between builders, who could otherwise claim ITCs when constructing a personal or rental property and thereby enjoy a tax advantage, and non-builders, who would need to pay GST/HST when purchasing such a property from a builder.
Of course, the builder doesn’t enjoy this tax advantage if he or she hasn’t claimed input tax credits for the construction. These cases don’t fit the rationale underlying the self-supply rules. Indeed, the common feature among the self-supply exceptions is that they apply where the property’s owner either did not or could not claim ITCs.
Subsection 191(5) of the Excise Tax Act ousts the self-supply rules if the builder used the built or renovated property primarily as his or her place of residence after completing construction. The personal-residence exception also applies if the builder’s spouse, former spouse, or relative used the property as a place of residence after the builder completed construction.
But the personal-residence exception doesn’t apply if either:
- (1) the builder is a corporation;
- (2) the builder claimed input tax credits for acquiring or improving the property; or
- (3) after its construction or renovation, the built or renovated property was used primarily for purpose other than as the place of residence of the builder or the builder’s spouse, former spouse, or relative.
So, if the builder is a corporation, the builder claimed ITCs, or the property was used primarily for purpose other than the builder’s (or qualifying relative’s) residence, the self-supply rule remains in effect. The builder must therefore account for the GST/HST payable on the fair market value of the property.
But the builder need not reside in the property without any intention of selling it later. The personal-residence exception in subsection 191(5) doesn’t require that the home be used as a permanent residence, a primary residence, or a principal residence. Instead, the provision asks that the home be used primarily as a place of residence for the individual builder. “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” (Coates v the Queen, 2011 TCC 74, at para 15).
Recall, both the self-supply rule in subsection 191(1) and the exception in subsection 191(5) apply only to builders. And a person is a builder only if that person’s activity constitutes a business or adventure in the nature of trade. As a result, subsection 191(1) and subsection 191(5) both take it as a given that the builder built or renovated the property with a business purpose—such as selling it for a profit. As a result, subsection 191(5) “involves a simple factual determination” of whether the home was “actually… used first by the individual (who is a builder as defined) as a place of residence” (Coates, ibid, at para 14).
To illustrate, in Coates, supra, an individual still met the self-supply exception in subsection 191(5) even though he built and sold a home in the course of an adventure in the nature of trade. So, although the individual intended to resell the home for a profit, he qualified for the exemption under subsection 191(5) because he lived in that home for over a year once he completed construction. In rendering its decision, the Tax Court of Canada explained that the test of whether a home was used primarily as a place of residence was distinct from the test of whether an individual renovated a home with the intention of reselling at a profit (Coates, ibid, at paras 8, 13, and 14):
The phrase “an adventure in the nature of a trade” has been considered in numerous income tax cases. The leading case concerning the question of what constitutes an adventure in the nature of trade is Happy Valley Farms Ltd. v. The Queen. At pages 6423-24 of that decision, Rouleau J. of the Federal Court, Trial Division, sets forth six tests which the Court should consider in determining this question. The tests or criteria are as follows: the nature of the property sold, the length of ownership, the frequency or number of other similar transactions by the taxpayer, the work performed on or in connection with the property, the circumstances giving rise to the sale and, finally, motive. …
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. …
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.
Subsection 191(6): The Student-Residence Exception
Subsection 191(6) exempts a university, public college, or school authority from the self-supply rule if the institution builds or substantially renovates a residential property for student housing.
The self-supply rules seek to prevent builders from gaining a tax advantage by claiming ITCs on personal-use or rental properties that they construct. If the builder weren’t able to claim ITCs in the first place, there would be no need for the self-supply rule.
This is precisely the sort of situation that the student-residence exception anticipates. Universities, public colleges, and school authorities cannot claim ITCs on the GST/HST costs they incur when constructing student housing. So, they aren’t the sort of entities that the self-supply rules aim to address.
Subsection 191(6.1): The Communal-Organization Exception
Under subsection 191(6.1), the self-supply rules don’t apply if a communal organization (e.g., a religious community) builds or substantially renovates a residential property exclusively for the purpose of providing a place of residence for members of a community, society, or body.
The rationale underlying this exception is the same as that underlying the student-residence exception. Communal organizations cannot claim input tax credits on the GST/HST costs incurred when constructing communal housing.
Subsection 191(7): The Remote-Work-Site Election
Subsection 191(7) provides an election allowing a registrant builder to defer the GST/HST payable under a self-supply rule. The election becomes available if the builder acquires, constructs, or renovates a residential property to house an employee or contractor at a remote work site. Moreover, the builder may claim input tax credits for GST/HST costs incurred to maintain the property during the time that an employee or contractor resides there.
Tax Tips – GST/HST Self-Supply Rules & Exemptions
The self-supply rules trap many unsuspecting builders. If you are a GST/HST registrant and you plan on building a personal home, don’t claim ITCs on your GST/HST costs. (Still, even if you do claim ITCs and thereby pay GST/HST under the self-supply rules, you might be able to claim the GST/HST New Housing Rebate for that tax.) You would benefit from discussing your options with one of our expert Canadian tax lawyers.
Moreover, our experienced Canadian tax lawyers have noticed that Canada Revenue Agency auditors tend to misconstrue the various self-supply exceptions and erroneously tax individuals under the self-supply rules. If you build residential properties and are the subject of a CRA audit, consult with one of our Canadian tax lawyers today.
Finally, if incurred GST/HST payable under a self-supply rule but failed to report that amount on your GST/HST return, contact one of our skilled Canadian tax lawyers to discuss remedial options like the Voluntary Disclosures Program.