House Flipping & Dual Motivations: GST for Home Builders and Renovators

Introduction

As we have discussed previously, the Canada Revenue Agency (CRA) has been targeting residential homeowners who find themselves being taxed on the sale of new or substantially renovated residential properties. This issue has become more prominent as homeowners try their hands at house flipping, often with dual motivations — wanting to renovate and sell for a profit while also potentially living in the property.

A recent Tax Court of Canada decision, Bryan v. The King, highlights the challenges homeowners face when they inadvertently become liable for GST/HST on the sale of their homes due to the complexities of the Excise Tax Act (ETA).

Background

Under the Excise Tax Act (ETA), certain home renovators can be classified as "builders" if they substantially renovate a property and later sell it. When a homeowner renovates and sells, this could trigger the requirement to collect GST/HST as though the property were new housing. These provisions are intricate and complicated, and the CRA has been actively assessing homeowners for this very issue.

Most residential properties are typically sold exempt under standard real estate contracts, meaning no GST/HST is charged. However, when a substantial renovation occurs, the homeowner might be considered a "builder" under the ETA, making them responsible for GST/HST on the sale price of the renovated property. This presents significant tax liabilities for homeowners engaging in house flipping activities.

Bryan v. The King: Case Analysis

In the Bryan v. The King case, the Tax Court of Canada (TCC) examined the circumstances of a homeowner (the "Appellant") who purchased a home intending to live in it with his family after extensive renovations. However, due to personal circumstances—such as the loss of the wife’s job—the family decided to sell the home instead. The issue arose because the Appellant had provided inconsistent evidence about when he moved his furniture into the home, and other aspects of his testimony were deemed illogical.

The TCC carefully considered the complex rules of the Excise Tax Act and ultimately ruled that the Appellant was liable to collect GST/HST on the sale of the home. The Court reasoned that the Appellant had "dual operating motivations"—the intention to live in the property and the possibility of turning it into a profit-making venture. The TCC’s decision underscores how a dual motivation can lead to liability under the ETA.

Takeaways

The Bryan case adds to the evolving body of law in this area, providing insight into how homeowners and renovators are increasingly caught up in CRA audits regarding GST/HST on property sales. The TCC has generally ruled that only when homeowners can demonstrate a clear intention to use the property as a personal residence—rather than a profit-making venture—will they avoid the classification as a "builder" liable for GST/HST.

For Canadians who have been contacted by the CRA regarding this issue, it is crucial to seek professional advice. Homeowners who are facing CRA audits or have received Notices of Assessment need to understand the complexities of the ETA and the dual motivations that could lead to significant tax liabilities.

Conclusion

The Bryan v. The King case highlights the intricate tax implications of house flipping and substantial home renovations under Canada's GST/HST laws. Homeowners who engage in renovations with dual motivations—whether for personal use or as a potential profit-making venture—should be aware of the potential GST/HST obligations. Seeking professional advice is essential for navigating these complex tax rules, especially when the CRA is involved. By understanding the legal landscape and ensuring compliance, homeowners can avoid unnecessary tax liabilities and penalties.

This article is written for educational purposes.

Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at [email protected], or by visiting our website at www.taxpartners.ca.

Tax Partners has been operational since 1981 and is recognized as one of the leading tax and accounting firms in North America. Contact us today for a FREE initial consultation appointment.