Click here to get a free online assessment of your case The case of Wang v The Queen is an interesting case where the Tax Court of Canada ruled that a taxpayer who sold a newly constructed townhouse a few months after she took possession was not a “builder” within the meaning of the Excise Tax Act and therefore not subject to GST / HST. The court gave what it called “determinative weight” to the sale being a result of a change in personal circumstances, namely the fact that the sale was prompted by her plan to move to the US to join her then fiance, whom she subsequently married in the US.
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Under the ETA, the sale of a residential unit by its builder is subject to GST / HST. The term “builder” generally includes someone who acquired the property as an adventure or concern in the nature of trade. The Canada Revenue Agency considers there to be a strong presumption that a flip of a new home is a taxable supply and subject to GST / HST. But as this case shows, the CRA isn’t always right. The courts will look at an individual’s personal circumstances.
The Court also summarized the factors that the courts will take into account in determining whether a sale was in the nature of trade (and therefore taxable as business income) or an investment ( and therefore treated as a capital gain). These factors include:
“1. The nature of the property sold. Although virtually any form of property may be acquired to be dealt in, those forms of property, such as manufactured articles, which are generally the subject of trading only are rarely the subject of investment. Property which does not yield to its owner an income or personal enjoyment simply by virtue of its ownership is more likely to have been acquired for the purpose of sale than property that does.
2. The length of period of ownership. Generally, property meant to be dealt in is realized within a short time after acquisition. Nevertheless, there are many exceptions to this general rule.
3. The frequency or number of other similar transactions by the taxpayer. If the same sort of property has been sold in succession over a period of years or there are several sales at about the same date, a presumption arises that there has been dealing in respect of the property.
4. Work expended on or in connection with the property realized. If effort is put into bringing the property into a more marketable condition during the ownership of the taxpayer or if special efforts are made to find or attract purchasers (such as the opening of an office or advertising) there is some evidence of dealing in the property.
5. The circumstances that were responsible for the sale of the property. There may exist some explanation, such as a sudden emergency or an opportunity calling for ready money, that will preclude a finding that the plan of dealing in the property was what caused the original purchase.
6. Motive. The intention at the time of acquiring an asset as inferred from surrounding circumstances and direct evidence is one of the most important elements in determining whether a gain is of a capital or income nature.”
The Court also stated that the most important of these factors was “motive” or “intention”. This will often be the deciding factor that influences a judge’s decision.
Going forward, given the CRA’s tendency to presume that any property “flip” is in the nature of trade, I suggest that new home buyers keep good records evidencing what their intention was at the time of the purchase, and if there is a change in their personal circumstance, evidence of what eventually prompted the sale.