GST/HST Tax Audit – Builders of Residential Real Property and Self-Supply – A Canadian Tax Lawyer Analysis
Introduction – Builders of Residential Real Property and Self-Supply
Building a new home, or renovating an old one, can be a stressful and overwhelming process. CRA can add to the stress by conducting a GST/HST Tax Audit. GST/HST has to be charged by the builder of a new home, and a substantial renovation can be considered new construction. In cases where a taxpayer has constructed a home (using a professional builder) and the Canada Revenue Agency(“CRA”) believes thatthe taxpayer also meets the definition of a builder and has therefore failed to account for, collect and remit GST/HST, the tax agency may issue a GST/HST assessment against the taxpayer based on the entire value of the home. Often, the GST/HST assessments include hefty penalties and interest, backdated to the original year of assessment.
The self-supply rules, as set out in section 191 of the Excise Tax Act,may be a complete response to the GST/HST tax audit, relieving the taxpayer of all the GST/HST assessed against him or her. This article briefly outlines the definition of a builder, and the self-supply rules that exempt the taxpayer from the obligation to pay GST/HST.
Meaning of Builder as Defined in the Excise Tax Act
The definition of builder is broad. Section 123 of the Excise Tax Act defines a builder as a person who, while the construction or substantial renovations of a residential property is underway, has an interest in the residential property or the land on which the property is situated. What is determinative as to whether a person meets this definition is the person’s interest in the residential property or the land. This means that a person can meet the definition ofa builder merely by owning the lot and the building constructed on it, even if he or she has engaged another individual or company to carry out the construction.
Builder’s obligation to remit GST/HST
Generally, a person who supplies goods or services to Canadian residents has an obligation to collect and remit GST/HST to CRA. A home builder is no different, and upon the sale or lease of a newly constructed house, condo or other residential property, he has a responsibility to account for, collect and remit GST/HST.However, if a builder meets the requirements of the self-supply rules, he does not have any GST/HST liability outstandingas a result of the sale or lease of that property.
Self Supply Rules as a complete response to a GST/HST Audit
The self-supply rules deem a builder to have accounted for, collected and remitted GST/HST when a particular property is sold or leased. Set out in section 191 of the Excise Tax Act, the rules outline situations where a builder is exempted from collecting and remitting GST/HST on a newly constructed or substantially renovated residential property. This means that the taxpayer, despite meeting the definition of a builder, has no obligation to remit GST/HST – the CRA considers the taxpayer to have met his or her obligation by virtue of the self-supply.
The self-supply rules apply when a builder uses the newly constructed or substantially renovated residential property for personal use. This means that the taxpayer uses the residential property, whether a new home or a condo, substantially for his personal use and enjoyment. It is important to note that the self-supply rules apply only if the taxpayer has not claimed any Input Tax Credits (“ITC”) for the particular residential property. If the taxpayer has claimed ITCs, the self-supply rules do not apply.
GST/HST Audit / Audit Proposal for a Builder of Residential Real Property
A taxpayer who meets the definition of a builder, and has used a newly constructed home or condo for personal use, may still find himself being subjected to a GST/HST Audit.
A GST/HST audit proposal may be issued when the CRA believes that the taxpayer, despite meeting the definition of a builder, and having resided in the property, does not meet the requirements as set out in the self-supply rule. The taxpayer is therefore found to be in breach of his responsibility to account for, collect and remit GST/HST on the sale or lease of a newly constructed, or substantially renovated residential property.
A typical scenario is when a taxpayer has, on more than one occasion over the course of a few years, purchased a condo unit,resided therein briefly and has subsequently sold the property and moved into a second unit. He or she has then sold this second unit and moved into a third condo unit.
Another example is a taxpayer who has, on more than one occasion over the course of a short period of time, purchased an older home, has substantially renovated and resided in the property; and he has repeated this pattern a few times. From CRA’s perspective, the individuals in the above examples, rather than simply changing their place of residence, have engaged in the business of selling real estate and are therefore obligated to pay GST/HST.
Once a GST/HST audit or audit proposal has been issued, the onus is on the taxpayer to respond within a reasonable time. In his or her response, a taxpayer can advance evidence to demonstrate that his factual scenario meets the requirements of the self-supply rule. If accepted by the CRA, the audit proposal is concluded and no assessment will be issued.
Whether a builder in the fact scenario outlined above meets the requirements of the self-supply rule is a factual determination. With some consistency, the courts have found certain factors, such as the taxpayer’s profession, or length of the builder’s residence in the property as determinative of a builder’s intention to use a residential real property for his or her personal use. However, there are no hard and fast rules and a determination of the application of self-supply rule is best conducted by a Canadian tax lawyer well versed in the applicable case law.
Tax Tips for Builders of Residential Real Property facing a GST/HST Tax Audit: Self-supply Rules
Generally, the purpose of a tax audit is for the CRA to gather all the necessary information to check whether a taxpayer’s GST/HST filings is accurate. To realize this goal, the CRA tax auditor has the power to ask for all the necessary documentation in making a final decision on your file. An important tax tip is to ensure that you keep a complete record of all the documents that support your position. As a builder of self use residential real property, it is critical that you keep a record of all the documents that establish your utilization of your house or condo for personal use. For example, keep a complete record of all your utility bills which demonstrate the length of your residence in the property, and the fact that you indeed lived on the premises. Newspaper or magazine subscriptions are also helpful. Ensure that all government offices have your updated address. It is important to keep in mind that a determination of a builder’s eligibility for self-supply rule is highly fact specific, and there are different types of evidence which can demonstrate personal use of the residential property. Having all your utility bills may be insufficient in establishing your position. Another critical piece of advice is to respond to the GST/HST Tax Audit as soon as possible. In the absence of a response from the taxpayer, a tax assessment will be issued by the tax auditor. Even if the tax assessment is incorrect, the amount of GST/HST assessed by the tax auditor is considered a tax debt owing by the CRA, and collection action will generally ensue. It is less costly and more efficient for a taxpayer to seek advice from a Canadian tax lawyer quickly and respond to the audit within a reasonable time. The GST/HST tax rules are complex and the interplay of the statute and the case law presents many opportunities for the builders who are faced a GST/HST Tax Audit to seek relief from the imposed penalties and interest.
Canadian Tax Lawyer GST/HST Tax Audit Help
If you are being subjected to a GST/HST Tax Audit, give our experienced Canadian Tax Lawyers a call. Our team is highly experienced in responding appropriately to protect your rights, and challenge the audit proposal or the assessment issued against you. The applicability of self-supply rules to any particular situation is a complex analysis. The self-supply rule may apply to your particular situation even if CRA says the rules do not apply. Our Canadian Tax Law firm can give you the representation you need to ensure you are not put out of business or forced into bankruptcy when faced with a GST/HST Tax Audit.