When it comes to GST/HST obligations, builders face some complex and often misunderstood rules in the tax system. These complexities can lead to reassessments from the Canada Revenue Agency (CRA) months or even years after a project is complete. Fortunately, these costly and disruptive reassessments can be avoided with the right guidance and planning.
Who Is Considered a “Builder”?
The first step in understanding GST/HST obligations is knowing whether you qualify as a “builder” under the Excise Tax Act. Builders include not just large developers, but also those that construct, substantially renovate, or even convert non-residential properties into residential use. You may also be considered a builder if you purchase a property and then make significant improvements before selling or renting it. Individuals who renovate for personal use are excluded.
Being classified as a builder triggers a host of excise tax implications, unlike a personal principal residence home resale, which is exempt from GST/HST as a non-builder. For builders, most new or substantially renovated residential properties are taxable in the course of a business or in the nature of trade. Builders must collect and remit GST/HST when these properties are sold or when they begin using them as rentals or for personal use.
Common Triggers for CRA Reassessments
Oftentimes, builder reassessments stem from failing to apply the rules correctly or from changes in how a property is used. Here are a few common triggers:
- The Self-Supply Rule: If a builder constructs or renovates a property and then decides to use it as a rental (rather than selling it, for example), they may be required to “self-assess” and remit GST/HST based on the fair market value of the property at the time it becomes a rental. The timing of the assessment is also important. Helpful hint: if Input Tax Credits were claimed, the builder is deemed to have received and made a taxable supply, and the self-assessment applies…
- Rebate Issues: Builders often misapply the New Housing Rebate or the New Residential Rental Property Rebate by assuming eligibility without confirming actual use. Common errors include claiming rebates for buyers who don’t meet the primary residence requirement or applying rental rebates without a valid long-term lease. These missteps can lead to denied rebates and costly reassessments. Note that these rebates are separate and subject to their own rules and deadlines.
- Change in Use: GST/HST consequences may arise if a property’s use changes from personal to rental, or rental to sale. Builders need to track these transitions carefully and understand when they trigger new tax obligations.
In many of these situations, the tax was not intentionally avoided. It’s the complexity of the rules and the builder’s changing plans that lead to trouble.
Steps to Avoid Reassessment
Fortunately, reassessments are often avoidable. Here are a few practical ways to stay on the right side of the rules:
- Document your intention related to the property at the outset.
- Keep detailed records. This includes timelines, costs, contracts, and evidence of how the property is used at each stage.
- Understand the tax treatment before changing your plan. Switching from a sale to a rental strategy can have serious tax consequences – understand them before making the change.
- Apply the self-supply rules correctly. These are especially important for rental properties and properties occupied by the builder or related parties.
- Be cautious with rebates. Ensure rebate eligibility criteria are met and properly documented.
How Your Tax Advisor Can Help
Given the complexity and the high stakes, it pays to work with a tax advisor who understands the nuances of the GST/HST system for builders. An experienced advisor can:
- Review your development plans and flag potential GST/HST consequences
- Help structure your project to reduce unexpected tax costs
- Assist with documentation and rebate applications
- Respond to CRA inquiries or audits and manage any reassessments
Whether you’re building a custom home, converting a property to residential use, or managing a multi-unit development, the GST/HST implications are too important to leave to chance. A conversation with your tax advisor at the planning stage is the best way to protect your bottom line.
