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DIRECTOR'S LIABILITY FOR HOME BUILDERS

 CRA TARGETS CORPORATE DIRECTORS

As we have blogged about here and here, the CRA continues to assess home builders, renovators and others in the residential real estate industry on the basis that their activities may constitute a business subject to GST/HST.

A recent Tax Court of Canada (“TCC”) decision in Ayoub v. the King, 2025 TCC 48 illustrates both the complexity of these rules and the risk that corporate directors can be held personally liable for unremitted GST/HST – even when the corporation is the builder!

Ayoub v. The King

In Ayoub v. the King, the Appellant was the sole officer, director and shareholder of a corporation that built homes for resale (the “Corporation”).  When the market softened in 2014-2015, the Corporation encountered cash flow issues, resulting in a series of GST/HST returns filed late – and often without payment.  To keep the business afloat, the Appellant took a number of steps, including:

1.     Renting newly built properties without consulting a tax professional, and not collecting GST/HST due from the triggering of “self-supply” rules;

2.     Failing to instruct his lawyer to hold back tax on property sale closings; and

3.     Advancing personal funds and loans in the six figures to cover the Corporation’s expenses and outstanding GST/HST.

The CRA assessed the Appellant personally (i.e., in his capacity as director) for the Corporation’s net tax owing, under subsection 323(1) of the Excise Tax Act.

In response, the Appellant raised a “due diligence” defence, arguing that the substantial personal funds he injected into the Corporation showed that he went “above and beyond” the degree of care of a reasonably prudent person in the circumstances.

The TCC rejected this argument.  The Court stated that the test to meet involves an analysis of the director’s actions to prevent the failure to remit tax and not those to cure such a failure after the fact.

The TCC found that the bulk of the Appellant’s capital advances were to cure the Corporation’s tax liabilities, and that a reasonably prudent person in similar circumstances would have (among other things):

1.     Instructed his lawyer to withhold GST/HST on the closing of property sales; and

2.     Consulted with his accountant before renting properties for additional income.

Why Do I Care?

Ayoub v. the King underscores the complicated nature of the GST/HST rules in this area of the law.  When houses are built for personal use by builders (i.e., self-occupation, or exempt rentals), the builders may in many cases be liable for tax on the fair market value, and their corporate directors can be pursued by CRA for those amounts.

While defences to these assessments, including the “due diligence” defence, can be available, their application depends on the facts surrounding each case.

Takeaways

The Ayoub case adds to the jurisprudence in this area, affecting corporate home builders and renovators assessed by the CRA.

Renting a newly constructed or renovated home can trigger tax liability, and the risk of personal liability for directors is real.  Professional advice before and after a CRA assessment is highly recommended.

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