1994 GST/HST Interpretation 11870-2[2] - One-Time Builders of Residential Complexes

This is in response to your correspondence of January 1994 regarding individuals who construct residential complexes with the intention of either selling them immediately, or of occupying the complex and subsequently selling same (i.e. "one-time builders"). We apologize for the delay in our response.

Although these "one-time builders" do not, generally, make a living from selling real property, it would appear that in certain instances they could be viewed as being engaged in the business, or in an adventure or concern in the nature of trade, of selling real property for purposes of the GST.

Statement of Facts

You have provided us with three possible scenarios regarding "one-time builders" and have asked us to clarify certain issues therefrom.

Case #1

1. A non-registrant individual, not involved in the construction industry, constructs a residential complex with the intention of selling the house upon completion.

2. From commencement of construction the house is listed and marketed for sale.

3. Upon completion of the complex, a softening of the real estate market causes the house to sit vacant for a period of two months.

4. As a result of inability to sell the house, as well as for financial reasons, the individual takes possession of the complex as his primary place of residence.

5. The individual continues to list the house throughout his occupancy and it sells two months later.

Case #2

1. A non-registrant individual constructs a residential complex with the intention of occupying the house as his or her primary place of residence.

2. Upon completion of the complex the individual takes possession of the house and subsequently claims a GST new housing rebate.

3. Within two months of taking possession of the house, the individual makes an exempt supply of the house by way of sale.

4. The individual repeats this process of building, occupying, and subsequently selling the residential complexes two or three times within a two year period.

5. An audit is performed and the auditor feels there is enough evidence to conclude that this activity is being conducted in the course of a business and the individual is a "builder" for purposes of subsection 123(1) of the Excise Tax Act (the "Act").

Case #3

1. Two houses have been constructed by a non-registrant individual over a short, but continuous, period of time.

2. The individual took possession of house #1, then subsequently applied for and received the GST new housing rebate. After selling house #1, the individual takes possession of house #2, which had remained unoccupied and applied for the GST new housing rebate in respect of that house.

3. Since house #2 was constructed as a "spec house", title to the land was not transferred to the individual until the house was completed.

4. The individual has represented himself as the builder of the houses for land title information purposes.

Interpretations Requested

The foregoing scenarios raise the following questions.

1. Are the individuals who constructed the houses considered to be "builders" as defined in subsection 123(1) of the Excise Tax Act?

2. Are the individuals required to register under section 240 of the Act?

3. Are the individuals required to self-supply under subsection 191(1) of the Act?

4. Are the individuals entitled to claim input tax credits (ITCs) or general rebates under section 257 of the Act in respect of the GST related construction costs?

5. Are the individuals entitled to new housing rebates?

6. Are the subsequent sales of the houses exempt from GST under Part I of Schedule V to the Act?

Interpretations Provided

1. The individuals would be "builders" for purposes of subsection 123(1) of the Act.

2. The individuals may be required to register if the sales of the complexes (including deemed sales) are considered commercial activities made in the course of a business.

3. The houses are not considered to be used primarily as a place of residence of the individuals, but primarily in the course of a business or an adventure or concern in the nature of trade. As a result, subsection 191(5) of the Act is not applicable and the individuals are required to self-supply on the fair market value of the complex under subsection 191(1) of the Act which deems the builders to have made taxable supplies of the residential complexes.

4. If the builders are registered, input tax credits are available in respect of the construction of the complexes and other costs related to the commercial activities. If the individuals are not registered, general rebates under section 257 of the Act may be claimed in respect of the construction costs at the time of the taxable sales (including a deemed sale) of the complexes.

5. GST new housing rebates under section 256 of the Act are available in respect of the deemed GST paid by the builders which is calculated on the fair market value of the complexes provided the requirements of the rebate are met.

6. The subsequent resales of the houses will be exempt under section 4 of Part I of Schedule V to the Act provided the requirements of the exemption are satisfied.

Analysis

The following provides the basis for the conclusions drawn above.

1. Builder

An individual who has an interest in real property and acquires or constructs a residential complex on said property, or engages someone to construct the complex, is not considered a builder within the meaning of "builder" set out in subsection 123(1) of the Act unless the acquisition or construction is in the course of a business or an adventure or concern in the nature of trade of the individual.

Where an individual constructs a residential complex for his or her own personal use, without the primary or secondary intention of resale, the person will not normally be viewed as constructing the home in the course of a business or an adventure or concern in the nature of trade. As a result, such individuals will not be considered a builder within the meaning of the Act.

If however the individual has constructed the home in which he or she resides with the primary or secondary intention of resale, the person may be said to have constructed the home in the course of an adventure or concern in the nature of trade or in the course of a business. The individual will then be considered a "builder" of a residential complex. The point at which an individual is considered to be engaged in a business, or an adventure or concern in the nature of trade, is a question of fact. Policy number P-059 "Business V. Adventure or Concern in the Nature of Trade" will provide assistance in this regard.

The foregoing analysis is supported by income tax jurisprudence whereby such individuals have lost their principal residence exemption because the residence is not considered capital property of the individual but rather business property. Indeed, it is important that the fact situation described above in respect of a particular taxpayer be brought to the attention of Taxation in order that the appropriate income tax assessment is also applied to the subsequent sale of the residence.

In this regard, several income tax cases have concluded that persons engaged in constructing houses that are to be sold for a profit, but who occupy the house as their place of residence prior to the sale are engaged in an adventure in the nature of trade and may be seen as being engaged in a business. (Note that for income tax purposes, a business generally includes an adventure or concern in the nature of trade.) In the case of Schlamp v. The Queen (82 DTC 6274), the Court stated, in part:

"... the plaintiff's conduct supports the conclusion that the plaintiff had the intention of turning a profit and that both residences had been built in the nature of an adventure in trade and the accruing profits were earned income. If it had not been concluded that the plaintiff's intention at all times was to engage in an adventure in trade, it would have been held that the doctrine of secondary intention applied. Namely even if he had the intention of living in the respective residences for a short or long period, he also had another intention, namely to use the property within the ambit of his activity as a builder. In other words, there was always present in the plaintiff's mind a dual intention. The home could serve as his residence for the time being, but could be sold for a sizable profit if the occasion presented itself."

Accordingly, given the pattern of re-sale set out in the facts, it would appear that the individual had an intention of constructing with a view to profit. Accordingly, once this can be established, it would be our view that the individual in question is a builder within the Act.

2. Registration

Where an individual has constructed a residential complex with the primary or secondary intention of resale, the complex will not be considered "capital property" within the meaning of subsection 123(1) of the Act since the complex is not considered capital property for income tax purposes (as discussed above). As a result, the individual will be required to include the consideration for taxable sales of the complex when determining whether the small supplier threshold was exceeded.

The first taxable sale of the complex (in excess of $30,000), including deemed taxable sales, will require the individual to register under section 240 of the Act unless it can be said that the only commercial activity of the person is the sale of real property and such sale was made otherwise than in the course of a business.

As noted above in the discussion of builder, the sale of a residential complex (including any deemed sale) may be considered as having been made in the course of an adventure or concern in the nature of trade where there is a primary or secondary intention of resale. In such case, the individual would not be required to register. If, however, it can be said that the sale was made in the course of a business, for example because the individual has a pattern of constructing and selling such homes, the individual would be required to register because the sale may be said to be in the course of a business. (For GST purposes, a business and an adventure or concern in the nature of trade result in different considerations.) Where the individual is making a deemed taxable sale in the course of a business (i.e. required to self-supply as discussed below) and the consideration (i.e. fair market value of the complex) triggered on the deemed sale is in excess of $30,000, the individual must register within thirty days of the deemed sale.

It may be that even the one time construction of a home for resale is made in the course of a business, but not necessarily considered a "commercial activity" requiring the person to register unless a business is "carried on" by the individual. This issue was sent to Mitch Bloom of General Tax Policy for response on March 2, 1994. A copy of this correspondence is attached for your reference. We will advise him of your concerns on this matter. In the meantime, any further questions relating to the registration requirement should be brought to his attention.

3. Self-Supply

Where the individual is considered a builder of a "residential complex" within the meaning of the Act, the individual would be required to self-supply under subsection 191(1) of the Act as the "builder" who has occupied the residential complex in question. Since the property is not considered capital property of the individual, it could not be said to be used primarily as a place of residence of the individual.

The property would, therefore, be viewed as being used primarily in the course of a business or in the course of an adventure or concern in the nature of trade. As a result, the exception to the self-supply rule in subsection 191(5) of the Act would not apply since the complex is not used primarily as a place of residence of the individual or a relative.

Subsection 191(5) of the Act may apply, for example, where a person has acquired a newly constructed residential complex with the primary or secondary intention of re-sale or rental but then abandons the intention of re-sale and occupies and uses the complex primarily as a place of residence. In such a case, the individual would be a builder since the complex was acquired in the course of a business or adventure or concern in the nature of trade (i.e. with the intent of re-sale or rental). There would be no self-supply, however, provided no input tax credits have been claimed by the individual in respect of the acquisition of the complex, because paragraph 191(5)(a) provides for an exclusion where at any time after the construction of the complex is substantially completed, the complex is used primarily as a place of residence of the individual or a related individual. Where, however, the primary or secondary intention of resale or arm's length rental is present throughout the occupancy, subsection 191(5) would not apply to exclude the application of subsection 191(1). (Subsection 191(5) may also apply to exclude the self-supply in the case of a multiple unit residential complex (including a duplex) occupied by a builder where the complex is primarily (i.e. more than 50%) occupied by the builder as his or her place of residence, and no input tax credits in respect of the complex were claimed.)

It should be noted that although the residential complex may be considered the primary place of residence of an individual, this does not necessarily mean that the property is used primarily as a place of residence of the individual. We are currently developing policies as to what constitutes a person's "primary place of residence" and what is meant by "used primarily as a place of residence".

Some of the factors to be considered for determining whether a residence is being used primarily as a place of residence are the individual's primary or secondary intent in acquiring the property or in constructing the complex (as possibly evidenced by the individual's course of conduct over the years, whether the complex was listed for sale or rental from the time of construction, etc.), whether the property is considered capital property of the individual, and the actual use being made of the property. Any further input from you in this area would be appreciated.

4. Input Tax Credits or Section 257 Rebate

Where the individual is required to register or voluntarily elects to register under subsection 240(3) of the Act (because he or she is engaged in a commercial activity), the individual will be entitled to claim ITCs in respect of the construction costs of the complex. Where the individual has not registered until after the commercial activity began, section 171 of the Act will apply to allow ITCs to be claimed for previously unrebated or uncredited GST relating to the construction of the residential complex and other amounts paid in relation to such commercial activity. Under section 171, the ITCs can not exceed the fair market value of the property at the time of becoming a registrant.

Where the individual is not required to register and does not voluntarily register, but is required to self-supply under section 191 of the Act, as a result of this deemed sale of real property section 257 of the Act will apply at the time of the deemed sale to allow for a rebate of previously unrebated GST relating to the acquisition of the real property and improvements to that property to a maximum of the amount of GST applicable on the deemed taxable sale. (The purpose of this provision is to avoid double taxation on the construction costs and on the deemed sale). The rebate under section 257 is limited to the GST relating to the construction of the residential complex. No rebate is available for other amounts that may be considered part of the commercial activity of the non-registrant.

5. GST New Housing Rebate

Whether the individual is entitled to a GST new housing rebate does not involve the issue of whether the property is primarily being used as a residential complex. The requirement for housing rebate purposes is that the residential complex be the primary place of residence of the individual. The first factor to be considered is whether the complex is the individual's only place of residence or if he or she has more than one place of residence.

Where the individual has only one place of residence, that place would normally be the individual's primary place of residence. If there is more than one place of residence, other factors need to be considered such as which place does the individual live in most often during the year or which place does the individual consider his or her primary place of residence. This may be evidenced by the individual's mailing address, telephone listing, etc.

Where the residence is found to be the individual's primary place of residence, the individual will be entitled to a GST new housing rebate under section 256 of the Act for the GST paid in respect of the supply of any improvements to the land that form part of a residential complex. (The definition of "improvement" in subsection 123(1) applies to property that is capital property. If the property is not capital property, as discussed above, the common meaning of improvements to property could be utilized since the housing rebate provision is not restricted to capital property. Similarly, it should be noted that the section 256 rebate is available to individuals who are considered the builder of the complex if they otherwise qualify for the rebate.) Accordingly, the GST paid by a builder on the deemed sale under section 191 of the Act can be said to be in respect of improvements to the land that form part of a residential complex and, therefore, a housing rebate is available based on the GST paid on the self-supply amount (i.e. the fair market value of the complex), provided that all of the criteria of section 256 are met.

6. Exemption on Re-Sale

As discussed above, if the individual is a builder, the individual would be required to self-supply under subsection 191(1) upon first occupying the residential complex as a place of residence. The re-sale of the complex by a builder who is required to self-supply under subsection 191(1) or (2) of the Act is normally exempt pursuant to section 4 of Part I of Schedule V to the Act. This is because the tax was already paid upon the self-supply. This exemption would not apply if the complex was substantially renovated after the last acquisition (i.e. since the self-supply) or an input tax credit was claimed in respect of the last acquisition or improvement to the complex since the last acquisition.

It should be noted that section 3 of Part I of Schedule V to the Act would apply to the scenario in question where the complex was used by the builder primarily as a place of residence. (This scenario is discussed above under "Self-supply" with respect to the application of subsection 191(5) of the Act.) This exemption will apply where a residential complex to which subsection 191(5) applies is being re-sold. (See examples above in the third paragraph under the discussion of Self-supply.)

Section 2 of Part I of Schedule V to the Act would apply if the individual is not considered a builder of the complex. As discussed above under Builder, the individual in question would be considered a builder of the complex since the complex was constructed in the course of a business or an adventure or concern in the nature of trade.

Should you require further information on this matter, please contact John Bain at (613) 954-8852, or myself at (613) 954-3772.

S. Farber
Manager, Tax Policy
Real Property
Policy and Legislation

Excise/GST

Attachment

11870-2, 11870-5

c.n. 1171(JB)1