2023 is shaping up to be quite a year for businesses operating in the real estate industry, with the Canada Revenue Agency (“CRA”) continuing aggressive industry audits (which have now made their way to court), and new tax rules for new housing assignments under the Excise Tax Act (“ETA”) and house flippers under the Income Tax Act (“ITA”)!
Background
The CRA has been focusing on the Canadian real estate industry for a few years now. In 2019, the CRA formed its Real Estate Task Force to investigate the underground economy in this industry. As we blogged about previously, many Canadians have been on the receiving end of CRA Inquiry Letters – some reaching back over 20 years of records!
In addition to the audits conducted by the task force, two major changes in the federal 2022 Budget will be strongly felt in the industry and will give the CRA even more latitude for future audits.
- New GST/HST rules for assignments of pre-construction purchases (see ETA 192.1): With this new rule, Parliament intends to address the speculative trading of new housing before it has been constructed or lived in. Previously, assignment sales were not taxable if the assignor (or original purchaser) had intended to use the house as its primary residence when it first purchased the house. Now, all assignment sales after May 6, 2022 are taxable for GST/HST purposes, regardless of the assignor’s original purpose!
- Proposed new income tax rules for house flippers: The 2022 Budget also proposed new house “flipping” rules to take effect for January 1, 2023 (currently being debated at third reading). Under the proposed rules, any person who sells a property held for less than 12 months will be subject to full taxation on their profits as business income (and therefore cannot take advantage of the primary residence exemption or possible capital gains treatment), with exceptions for sales as a result of significant life events like death, disability, divorce, etc.
Although this rule applies only to income taxes, we expect that if a sale is deemed to be for business purposes under the new ITA rules, the CRA will likely take the position that the taxpayer is carrying on a business for GST/HST purposes as well to avoid having inconsistent audit positions.
Carvest Case
On the caselaw side, the Federal Court of Appeal’s (the “FCA”) recent decision in Carvest Properties Limited Canada, 2022 FCA 124 (“Carvest”), is an example of another CRA assessment with unfortunate outcomes for a builder.
In Carvest, Carvest Properties Limited (“CPL”) developed an apartment building. To avoid municipal apartment taxes, CPL registered the building as a condominium under Ontario’s Condominium Act, although their intention was still to rent the units as apartments to tenants. CPL used the ETA’s apartment building valuation rules to self-assess itself GST/HST, calculating the fair market value (“FMV”) of the building as a whole (ETA 191(3)). The CRA audited CPL on the basis that each unit of the building ought to have been valued separately in accordance with the rules for condominiums (ETA 191(1)) — resulting in a much higher GST/HST bill.
On appeal, the FCA agreed with CRA, finding that the FMV should be calculated using the condominium rules since the building was registered under the Condominium Act. This was even though the units were being rented and were not available for individual sale. The fact that CPL registered the building was fatal to their case.
Commentary
The cumulative effect of these developments shows that CRA intends to further focus on this industry as it attempts to weed out potential non-compliance.
Now, with the new assignment and house flipper rules, the CRA has even more opportunities to audit taxpayers, making Canada’s housing industry a minefield of complicated tax issues! Businesses and individuals unlucky enough to be facing the prospect of an assessment should seek professional guidance.
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