As we initially described here, the Canada Revenue Agency (“CRA”) continues auditing and assessing individual home-owners who have either substantially re-built their homes or commissioned the construction of a new home for their own use on the resale value of those homes in a number of alarming instances.

Background

Section 191 of the Excise Tax Act (the “ETA”) contains some complicated rules that can, in some appropriate instances, create self-assessment or tax collection obligations when existing residential housing is substantially renovated or newly commissioned by an individual owner of the property.  But generally, there are exceptions made for individuals really intending on living in those properties, such that the entire venture can be treated as a non-taxable event (i.e., pay GST/HST on your building inputs, and CRA should be generally happy with you living in your own home and selling it later on an exempt basis, like any other used residential housing sold in Canada every day of the year).

Unintended Problems

The problems we are seeing are where plans change, and then CRA just takes (potentially) unreasonable views of things.

For example, your Dad decides to help you buy a run-down property, puts a lot of work into it, and you are ready to move in with your new spouse.  But your partner has misgivings.   Maybe too far from his/her parents.  Maybe a rougher neighbourhood and just not right for the kids.  So you decide to sell and go in a different direction.   You could be liable to charge and collect GST/HST on that sale.  “No, you say.  That cannot be right!”  As much as I might agree with you, you would be wrong.  CRA is assessing these situations.

Another common example appears to be where an individual has a history (even a short history) of buying and reselling their principal residences.  CRA is combing through these situations, providing Questionnaires (which, under the government's new budget rules, are now positively required to be answered).  (And on that subject, these rules are positively frightening, with some penalties for non-compliance with some questions, leading to huge penalties and potential jail time!)

Takeaway

The bottom line, in this particular area, is that CRA continues to be the elephant in the room when it comes to audit and assessment activities.  The Elephant that is the CRA, really gets to do whatever it wants.  And right now, the residential housing industry (and the CRA’s desire to make chronic house-flippers get into the tax system, and pay their fair share of taxes) is unfortunately slipping over to adversely impact people with purely personal goals.

While it may be difficult to push an elephant off its established position, good legal assistance is the first step.

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