While the government of Canada appears focused on the political hot potato that is our residential housing industry, announcing new rules for rental houses are coming, the CRA is headed in the other direction, apparently targeting residential home-owners that have recently sold their homes, on the basis that the degree to which they fixed them up prior to sale caused the homes to become “new homes” and subject to full GST/HST on their fair market value.
Treating Residential Homeowners as “Builders”
As we have blogged on a few times in the past (see bottom right below), CRA has apparently moved into full gear in assessing residential homeowner for “GST/HST” on the sale of their houses – including in a number of unexpected situations (e.g., years after the sale of a residential home, with the CRA assessing the former owner for full GST/HST allegedly owing on the value of the home).
Here the CRA either suggests that the activities were ‘commercial’ in nature (i.e., involving contractors posing as “residential owners” but repeating that process regularly) or in a situation more difficult to comprehend for the average homeowner, taking the position that the home “owner” is actually a “builder” for GST/HST purposes.
Under the GST rules, builders are subject to what is colloquially referred to as a ‘Self Supply’ requiring them to self-assess and remit GST/HST on the fair market value (“FMV”) of a newly completed/substantially renovated “residential complexes” when they are first sold.
To put this into the plan vanilla example, consider as follows:
Homeowner A buys a used residential home for $900,000, and almost fully renovates it, putting $400,000 into the changes. Owner A then lives in the house for a bit, before selling it for $1,500,000, realizing a tidy $200,000 gain.
Depending on the facts and CRA’s view of the extent to which Owner A properly viewed as engaging in a personal or commercial activity (i.e., an adventure or concern in the nature of trade), the applicable GST rules can sometime operate to make Owner A liable (on these facts) for almost $200,000 – effectively erasing any gain made on the sale – assuming a sale in Ontario.
Takeaways
Residential homeowners finding themselves in these sorts of situations usually need legal assistance – and that legal assistance would be called for even more if there is any sort of pattern of buying, fixing up and reselling.
The legal position that may will find themselves in will not have a “cookie-cutter” answer, and it will be important to understand that facts of each case before assessing next steps or completing CRA’s Questionnaire’s in this area. Forewarned is forearmed!
As a final point, the result of miscalculating one’s liabilities in this area is often the rough equivalent of 13% of the selling price of one’s home – which in today’s market is usually a BIG number!
Read some prior blogs on this topic below:
Big Problems coming for Small Home Builders
Time Bomb Ticking on Canadian Home Construction Industry
Does the CRA consider you to be a commercial builder? Maybe!
Click here for assistance in this area.