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GST/HST and income tax — real estate agent built home for personal use

My client was a real estate agent who sold new condominium projects. He built a new home for himself and his girlfriend to live in. It was customized in many ways. He was not intending to sell it, and moved in for a period of time while construction was being finished. Unexpectedly, he received a very high offer, and so he sold the home and built a very similar home on a different property in the same neighbourhood.

My client was audited for GST/HST. The GST/HST auditor decided that, since my client was in the real estate business and sold the home soon after it was built, he must have intended all along to sell it. Thus, in the auditor’s view, my client was liable for not collecting and remitting HST on the sale. The CRA assessed him for HST accordingly.

I filed a detailed Notice of Objection with extensive supporting documents to show that the assessment was wrong. Meanwhile, the CRA began an income tax audit of my client, proposing to tax him on his gain on the home as business profit, again on the theory that he built the home in order to sell it. I sent the income tax auditor the same submission that we had used for the GST/HST objection.

In this submission, I and my co-counsel showed why the auditors’ understanding of the facts was wrong:
  • My client had never built a home before. He was a real estate agent and had bought rental properties, but was not in the building business.
  • The home had a number of extremely unusual and expensive features, specific to my client’s and his girlfriend’s needs and lifestyle. These were features that no builder would ever put into a home they were intending to sell. I listed these and provided photos, drawings, emails and texts as supporting evidence.
  • My client’s builder, architect and interior designer, and various other people all provided sworn Affidavits confirming that they knew he was building the home for himself to live in. I also provided numerous supporting emails and texts from the construction period whose tone and language clearly showed this to be true.
  • The agent for the buyer provided an Affidavit confirming that when she first approached my client about the property, he told her it was “not for sale”, and only relented after she told him how much her clients were willing to pay.
  • I provided evidence that my client had renewed the mortgage for 5 years shortly before he agreed to sell the property. As a result, he had to pay a substantial penalty to pay off the mortgage early. If he had been intending to sell, he would never have renewed the mortgage as a closed mortgage that could not be paid off without penalty.
In total, I sent the CRA a 40-page analysis and explanation, with over 350 pages of supporting evidence. This took me and my co-counsel many hours and was a very expensive process. But it was worth it. At the end of the day, the GST/HST Appeals Officer and the income tax auditor both agreed that, whether or not they believed my client had actually moved into the home, it was clear that he built the home for personal use, and not for resale. As a result, they cancelled the HST assessment and the proposed income tax assessment, saving my client millions of dollars.

Problem solved!

(2024)