September 20, 2022
By: Mina Alexander, Senior Associate, Farber Tax Law
Imagine this: you’ve picked your dream home in pre-construction, put down a deposit and waited years until it was finally built. Shortly after you take possession of the home you realize your circumstances have changed, the home no longer fits your needs and you decide to sell it.
All of a sudden you’ve received a letter from the CRA claiming you’re a builder and they want to collect Harmonized Sales Tax (HST) on the sale of the property – how does this make sense?
Why is the CRA involved?
To start with some background information, HST is included in the sale price of all newly built houses and condominiums. The CRA requires “builders” to collect and pay the HST to the CRA, but that term applies more broadly than most people expect.
A “builder” can include not only a person who builds a house or condo but also a person who buys a newly built house or condo to flip it. The person alleged to have flipped a newly built house or condo is often charged 13% of the sale price, plus penalties, after an audit!
The core of the difficulty in these cases is that everyone buys property with the hope and expectation that it will rise in value. At one end of the spectrum, a person who lives in a house for twenty years clearly isn’t flipping it. On the other end, a person who buys and sells twenty properties in a year would struggle to argue that they aren’t flipping properties.
In the middle are cases where a person sells a property in the first year or a few years after buying it. The CRA’s view is usually that the best evidence of a person’s intention is what they actually did. In other words, if a person sells a property right after buying it, the simplest explanation is that they always intended to do so. To succeed on these matters, you need to clearly explain what your intention was with the property and why it changed.
What to do if the CRA thinks you’re a builder
Significant events can occur in a person’s life during the long period from putting a deposit on a pre-construction property, and closing on the purchase. A condo suitable for a 28-year-old single person may not be suitable for a recently married 31-year-old expecting a child.
Family, employment or education changes may impact your housing needs in ways you can’t predict. Whatever the reason for your changed intention, it is imperative that you effectively communicate your story to the CRA and support it with evidence.
If you receive a questionnaire or audit letter from the CRA regarding real property (land and buildings), your first step should be to contact a tax lawyer with experience handling these specific matters. You get only one chance to make a first impression, and a skilled tax lawyer can ensure that your story is communicated effectively, that all available evidence is acquired and organized, and that land mines or miscommunications are avoided.
Resolving your tax dispute is what we do best and it starts with a conversation. Contact us today to get started.