In a prior Blog on the “Time Bomb Ticking on Canadian Home Construction Industry” we discussed the problems facing Canadians who make money buying, fixing up, and reselling their alleged “principal residences”.
We said then: “An individual buying a run-down house, fixing it up, and living in it a while, and then selling for a tidy income tax exempt profit (the house being the individual’s principal residence) sounds like a recipe for success. [But repeat] that 21 times in a row, and you may have a different kettle of fish!”
Apparently, all you have to do is “repeat 2 times in a row” to be liable for income taxes on our profits, and uncollected GST/HST on your sales revenue!
The Federal Court of Appeal in Wall v The Queen, considered a taxpayer that, between 2004 and 2010, purchased three houses, demolished each of them and then constructed and sold new houses at a profit. Mr. Wall treated the profits as exempt taxable gains, on the basis that the houses were his principal residences for income tax purposes, and that he was not a “builder” of any of them for GST/HST purposes.
The CRA reassessed the gains as taxable profits for income tax purposes, and also assessed under the GST/HST provisions in the Excise Tax Act (ETA), imposing a 13% uncollected GST/HST on Mr. Wall, based on the selling prices of the homes. [Ouch!]
Mr. Wall lost his case in the Tax Court of Canada, which concluded that he was in fact “carrying on a business”, and thus (1) not able to rely on the “principal residence exemption” under the ITA, and (2) also the “builder” of residential complexes for the purposes of the ETA, making the sales of the new houses all taxable for GST/HST purposes.
The FCA declined to overturn the Tax Court of Canada, on the basis that the taxpayer was, in its view, carrying on activities that amounted to a business.
The Wall case is a gut punch to most home flippers and should have them running for tax lawyers!
The decision will also almost certainly embolden the CRA’s current efforts to bring house flippers into the income tax pool, and may also catch these same taxpayers sleeping when it comes to the expected GST/HST impact – which could often out-weigh even the income tax payable on some of these transactions.
What can I do?
If you see Mr. Wall’s situation as a familiar one, you might benefit from some legal advice to discuss options, like the CRA’s Voluntary Disclosure Policy.
If the CRA has already contacted you, or is in the process of an audit, you definitely would benefit from some legal advice, to consider how to best defend the Audit or defeat a Notice of Reassessment. Each case is different, and your case will ultimately be based on your facts. A skillful tax litigator can help you properly explain your own factual situation to the CRA, and ultimately defend you before the Courts.