GST Relief on Housing: What Mark Carney’s Platform Means for You

The Canadian government’s recent Liberal proposals to reform the Goods and Services Tax (GST) and Harmonized Sales Tax (HST) framework under the Excise Tax Act (ETA) have introduced significant changes targeting real estate transactions. Aimed at curbing tax evasion and speculative activities such as house flipping, these proposals tighten rules around GST/HST collection, redefine key terms like “builder,” and enhance audit mechanisms. This article provides a comprehensive analysis of the compliance what-ifs, practical impacts on stakeholders, and broader implications for the real estate sector, equipping taxpayers, builders, investors, and advisors with critical insights to navigate this evolving landscape.

Understanding the Liberal GST/HST Proposals (Excise Tax Act, Part IX)

The proposed changes focus on strengthening GST/HST compliance in real estate, particularly for newly built or substantially renovated properties. Key elements include:

• Expanded Definition of “Builder”: Under section 123(1) of the ETA, the definition of “builder” is broadened to include individuals or entities engaged in construction or substantial renovation, even if not their primary business, capturing one-time renovators or house flippers involved in adventures or concerns in the nature of trade.
• Stricter Rebate Eligibility: Rebates such as the GST/HST New Housing Rebate (s. 254) and New Residential Rental Property Rebate (s. 256.2) face narrower eligibility criteria to prevent misuse by those not using properties as primary residences or long-term rentals.
• Enhanced Audit Powers: The Canada Revenue Agency (CRA) gains expanded authority to scrutinize transactions, with a focus on unreported GST/HST from property flips and non-compliance in rebate claims.
• Mandatory Registration: Certain property transactions now require GST/HST registration under section 241, with penalties for non-compliance.

These reforms aim to protect revenue and address housing market speculation, but they also increase compliance complexity for stakeholders.

Compliance What-Ifs: Key Scenarios and Risks (ETA, ss. 123(1), 165, 241)

The Liberal proposals introduce several compliance challenges that could catch taxpayers off guard. Below are critical what-if scenarios, supported by legal provisions and case law:

• What if you’re deemed a builder unexpectedly? The expanded definition under section 123(1) means individuals renovating and selling properties—even as a one-off—could be required to register for GST/HST (s. 241). Failure to do so may lead to penalties and reassessments, as seen in Gerlings v. Attorney General of Canada (2024 FC 1892), where the CRA retroactively assigned business numbers.
• What if a property flip is misclassified? Sellers failing to report GST/HST on renovated property sales, assuming exemption under Schedule V, Part I, section 2, risk reassessment as taxable under section 165(1). CRA’s focus on short-term holdings in Toronto and Vancouver heightens this risk.
• What if rebates are denied post-closing? Buyers expecting rebates under section 254 may face denials if the CRA determines the property wasn’t used as a primary residence. Cheema v. Canada (2018 FCA 45) illustrates how technicalities like co-ownership or bare trustee arrangements can disqualify claims, leaving buyers with unexpected tax burdens.
• What if audit scrutiny increases? With CRA’s real estate crackdown recovering $2.2 billion in assessments from 2015–2022, non-compliance could trigger audits years after transactions. Penalties under section 280 for late filings or errors add further risk.

Planning Tip: Maintain detailed records of property use, renovation costs, and intent (personal vs. commercial) to substantiate GST/HST positions during audits. Consider pre-emptive registration if engaging in frequent transactions to avoid retroactive penalties.

Defining Substantial Renovation and Self-Supply Rules (ETA, ss. 123(1), 191)

Central to GST/HST obligations is the concept of substantial renovation, defined under section 123(1) as renovation where all or substantially all of a building (excluding foundation, external walls, and other structural elements) is removed or replaced. The CRA interprets this as 90% or more of relevant space, a threshold generally accepted by courts (2437299 Ontario Inc. v. Canada, 2023 TCC 165).

When a builder substantially renovates a property, the self-supply rules under section 191 deem a sale and repurchase at fair market value upon completion, triggering GST/HST liability. This applies even to individuals not traditionally in the construction business if deemed a builder. A limited exemption under section 191(5) exists for individuals renovating their own primary residence, provided no input tax credits are claimed and the property isn’t used for other purposes before occupancy.
Planning Tip: Document renovation scope with before/after photos, contractor invoices, and architectural plans to establish whether the 90% threshold is met. Consult tax professionals before major renovations to assess builder status and self-supply implications.
Rebates and Exemptions: Opportunities and Pitfalls (ETA, ss. 254, 256.2)

The Liberal proposals tighten eligibility for rebates, creating compliance traps:

• GST/HST New Housing Rebate (s. 254): Available to individuals purchasing new or substantially renovated homes as primary residences, with federal rebates up to $6,300 for homes priced at or below $350,000, phasing out at $450,000. Provincial rebates (e.g., Ontario’s up to $24,000) may apply. Strict occupancy and ownership rules apply, and beneficial ownership alone is insufficient.
• New Residential Rental Property Rebate (s. 256.2): For rental investors, this rebate applies to units leased for at least one year, with no price threshold but a two-year filing deadline from closing or substantial completion.
• Principal Residence Misconception: The principal residence exemption under the Income Tax Act shields capital gains but offers no protection from GST/HST obligations on substantial renovations, a common taxpayer error.

Planning Tip: Ensure legal titleholders meet occupancy requirements for rebate claims and secure long-term lease agreements (minimum 12 months) for rental rebates. File applications within deadlines to avoid forfeiture.

Change-in-Use Rules and Tax Interplay (ITA, ss. 45(1)–(3); ETA, s. 45)

The interplay between GST/HST and income tax rules adds complexity. Under ITA section 45, a change in property use (e.g., personal to income-producing or vice versa) triggers a deemed disposition at fair market value, potentially resulting in capital gains and GST/HST consequences. Elections under sections 45(2) or 45(3) can defer recognition, but limitations on capital cost allowance claims apply.
Planning Tip: Advise clients on timely elections to defer capital gains and assess GST/HST implications of use changes, especially during renovations or repurposing of properties.

Audit Triggers and CRA Enforcement Trends

The CRA has intensified real estate scrutiny, with specialized audit teams targeting high-risk areas like property flipping and unreported GST/HST on renovated homes. Recent data indicates over 62,000 audits in 2022–23 with a $14.3 billion fiscal impact, and $298.9 million in penalties in Ontario and British Columbia alone from 2015–2022. Key triggers include short-term flips, lifestyle discrepancies, and incorrect rebate claims.

Planning Tip: Retain comprehensive records (contracts, permits, invoices, occupancy documents) for at least six years to support GST/HST positions. Consider voluntary disclosure before audits to reduce penalties.

Impact on Stakeholders: Winners and Losers

The proposals affect real estate stakeholders differently:

• Individual Buyers and First-Time Homeowners: Stricter rebate criteria increase upfront costs for new homes, though provincial rebates may mitigate impact.
• Property Flippers and Speculators: Mandatory GST/HST collection and audit scrutiny reduce profit margins, compounded by loss of capital gains exemptions if taxed as business income.
• Builders and Developers: Larger entities may offset costs with input tax credits under section 169, but small-scale builders risk unexpected builder status liabilities.
• Rental Property Investors: Tightened criteria for rental rebates may discourage rental housing investment, impacting supply.

Planning Tip: Tailor compliance strategies to stakeholder type—e.g., secure long-term leases for rental investors, ensure rebate eligibility for buyers, and clarify GST/HST in contracts for flippers.

Broader Implications for the Real Estate Market

Beyond immediate compliance, these GST/HST changes could reshape market dynamics. Higher tax burdens on speculative transactions may cool overheated markets in cities like Toronto and Vancouver, aligning with government goals to curb price inflation. However, reduced rebates and increased costs for new homes could deter first-time buyers, slowing housing starts. The tougher enforcement landscape, evidenced by billions in assessments, disproportionately burdens smaller players lacking resources for compliance.

Takeaways

• Compliance is non-negotiable: Stricter enforcement demands proactive GST/HST registration and accurate reporting to avoid penalties.
• Understand key definitions: Knowing builder status and substantial renovation thresholds is critical to managing tax obligations.
• Leverage rebates strategically: Navigate tightened eligibility with thorough documentation and professional advice.
• Prepare for audits: Robust record-keeping and voluntary disclosures can mitigate risks.
• Anticipate market shifts: Stakeholders should brace for impacts on property values, rental supply, and buyer behavior as tax costs rise.

THE INFORMATION PROVIDED IN THIS ARTICLE IS FOR GENERAL INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL ADVICE. FISZMAN TAX LAW RECOMMENDS CONSULTING A QUALIFIED ATTORNEY FOR ADVICE PERTAINING TO YOUR SPECIFIC SITUATION.