Jul

GST rebate for brand new-ish home

Posted By: Bobby B. Solhi on July 26, 2012 at 3:45:27 in All , Articles

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Congratulations on your brand newish home – now pay the GST! 

Normally a purchaser of a newly-constructed residential home is required to pay GST/HST when purchased from a builder. The builder will typically charge GST/HST on the purchase price, collect, and then remit that amount to the CRA. As with much of tax law in general, however, there are always exceptions.

Under the GST/HST regime, there are special cases where a purchaser of a newly-constructed home is not required to pay GST/HST. One such case was discussed very recently in Daruwala, et al. v. The Queen .

Full GST Rebate Allowed

The taxpayers in Daruwala were successful in arguing that their purchase of a newly-constructed house was exempt from GST because the home was lived in prior to their purchase, and therefore, the builder was required to pay the GST pursuant to the self supply rules under s. 191(1) of the Excise Tax Act (“ETA”).  As a consequence, the taxpayers were entitled to a GST rebate of $78,095.24 that was paid in error.

Background

On June 30, 2009, the appellant’ taxpayers purchased a newly-constructed home (the “Property”) in West Vancouver for $1,561,904.76 and paid $78,095.24 in GST to the builder, TRG Construction Corp. (“TRG). This was the first home built by TRG. It was a corporation established by Mr. Goshtasb Hassani, a new immigrant to Canada, to satisfy immigration requirements under the business immigrant investor program.

When the appellants first viewed the Property it appeared to them that it had been previously occupied. They observed furniture in the home and some garbage in the kitchen. After taking possession, they were even more convinced that it had been occupied citing unclaimed mail for the Hassani family and TRG, and evidence of burn damage on the roof of their oven.  Regardless, the builder insisted that the appellants were required to pay the GST.

Soon after taking possession, the appellants filed for a GST rebate on the basis that the house had previously been occupied, and that it was exempt from GST. The Minister denied their GST rebate claim and the matter proceeded to the Tax Court of Canada.

Counsel for the appellants argued that the Property had been occupied as a place of residence while it was owned by TRG, and that the builder was required to pay the GST under the self supply rules – more specifically, s. 191(1)(b)(ii) of the ETA. Accordingly, their purchase was exempt under s. 4(b), Sch. V of the ETA.

The Minister’s case was based largely on the testimony of Mr. Hassani and his son. Mr. Hassani testified that they had difficulty selling the home in 2008 because of poor market conditions at the time, and that he stayed at the Property for a couple months for an average of three to four nights a week in order to protect the property. He also testified that his mail was being redirected from his home in Coquitlam to the Property so as to receive timely updates as to his immigration status. No explanation was given as to why mail for his spouse and two sons were also forwarded there.

What are the requirements of s. 191(1)(b)(ii)?

Put simply, the self supply rule under s. 191(1)(b)(ii) requires that:

(a) the builder has given possession or use of the home;

(b) under a lease, licence or similar arrangement; and

(c) the arrangement is entered into for the purpose of occupancy as a place of residence.

Where these requirements are met, the builder is deemed to have received a taxable supply and paid, as recipient, and collected as a supplier, GST/HST in respect of the home calculated on the fair market value. The builder would be required to include the GST/HST in its net tax under s.225(1) and to remit it to the CRA under s. 228(2).

Tax Court on Self-Supply Rule

Woods, J. provided useful direction on the interpretation of s. 191(1)(b)(ii) in her judgment.

With respect to the second requirement, Woods, J. held that there was no requirement for there to be a formal lease, licence, or similar arrangement – in other words, an informal arrangement would meet this test, as the wording in this provision was broad enough to include arrangements such as those in the case at bar.

As for determining the “place of residence” under the third requirement, Woods, J. found that the normal test for residence for purposes of income tax did not make sense for the self supply rules in the GST/HST context. Rather, the test is whether the builder gave occupancy to a person for the purpose of enabling that person to occupy the property as a home – there is no reference to personal or social ties to that place as would normally be considered for income tax purposes. The suggestion is that a lower standard is applicable to occupancy as a place of residence under s. 119(1)(b)(ii) than the general residence requirement.

And lastly, with respect to the burden of proof in these types of cases, the appellants only bear the burden of establishing the intended use of the property on a prima facie basis. This was clearly met by the appellants, reversing the onus onto the Minister who could not provide persuasive evidence to support its contention that the property was not occupied as a place of residence prior to its sale to the appellants.  Critically, the Minister could not provide adequate reasons to explain away the fact that mail belonging to Mr. Hassani, his family, and TRG was being sent to the Property, and not his home in Coquitlam.

Editorial Comments

While economic conditions are generally good at the moment, the temptation to rent or provide use of a newly-constructed or substantially renovated home may be greater in difficult economic times, like it was in 2008/2009. The decision in Daruwala suggests that there is a low threshold to meet for self supply rules to apply where the home has been occupied prior to its sale.

Had the purchase in Daruwala taken place in Toronto, post-June 30, 2010, HST would have applied for $203,047.62 – not an insignificant amount. For purchasers in Ontario, there would a $24,000 HST rebate for the provincial portion of the HST; however, it might be worth exploring whether a 100% HST rebate would be available where prior occupancy is suspected.

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