HST Assessments on New Residential Builds: Exposure, Pitfalls, and How to Fight Back

The Canada Revenue Agency has made harmonized sales tax on new residential construction a sustained enforcement priority. Audits and assessments increasingly target individual homeowners, small developers, investors, and builders who constructed or substantially renovated housing and either claimed a rebate, rented the property, or sold it shortly after completion. Many recipients of these assessments are surprised to learn that the liability can reach six figures and that the statutory rules are highly technical, counterintuitive, and unforgiving. A disciplined response grounded in the Excise Tax Act, the relevant regulations, and the jurisprudence can dramatically improve the outcome.

Why New Builds Attract HST Scrutiny

Unlike resale housing, newly constructed or substantially renovated residential property is generally subject to GST or HST. Parliament created a complex rebate system to mitigate the tax burden on owner occupied housing, including the new housing rebate and the new residential rental property rebate. These rebates are conditional. If the conditions are not met or cease to be met, the Agency may assess the homeowner or builder for the full tax that would otherwise have been payable.

Three recurring triggers draw scrutiny. First, the property is sold within a relatively short period after completion, suggesting that it may have been built with an intention to sell rather than to occupy as a primary place of residence. Second, the property is rented, especially for short terms or to non arm’s length occupants, raising questions about whether the rental rebate was properly claimed. Third, the construction was undertaken by the homeowner acting as a “builder” for tax purposes, which can impose self supply obligations even where no commercial developer was involved.

The Builder Deeming Rules

A critical concept is the statutory definition of “builder.” A person can be deemed to be a builder even if they never held themselves out as a developer. For example, a homeowner who acquires land, constructs a house, and sells it without having used it primarily as a residence may be treated as a builder. Builders are subject to special rules that deem them to have made and received a taxable supply to themselves upon substantial completion. This self supply rule crystallizes tax even in the absence of an actual sale.

Disputes often hinge on whether the taxpayer constructed the home primarily for personal use or for sale. The Agency examines objective indicators such as financing arrangements, marketing activity, prior development experience, occupancy patterns, and the timing of the sale. Courts have repeatedly emphasized that subjective intention is relevant but must be supported by conduct.

Primary Place of Residence Requirement

For the owner occupied rebate, the individual or a close relation must intend to use the home as a primary place of residence. Brief occupancy will not necessarily suffice if the surrounding facts indicate that the true purpose was resale. Conversely, a genuine change in circumstances after completion can preserve entitlement. Employment relocation, family breakdown, health issues, or unexpected financial stress have been accepted as legitimate reasons for a sale that do not retroactively taint the original intention.

The Agency frequently challenges claims where occupancy was short or intermittent. Detailed evidence becomes decisive. Utility records, insurance policies, voter registration, driver’s licence addresses, school enrollment for children, and testimony from neighbours can corroborate that the property functioned as a real home rather than a staging ground for a flip.

Rental Properties and the Self Supply Trap

Individuals who build a property and then rent it long term may qualify for the new residential rental property rebate. However, this regime contains its own hazards. The builder self supply rule typically applies when the first tenant takes possession, requiring the builder to account for tax on the fair market value of the property at that time. Failure to report this deemed supply can lead to assessments for unremitted tax plus interest and penalties.

Short term rentals create additional complexity. Transient accommodation resembling hotel use may disqualify the property from treatment as residential housing for rebate purposes and can trigger registration and ongoing collection obligations. Many assessments arise where owners alternated between personal use, short term rentals, and eventual sale without appreciating that each transition can carry tax consequences.

Common Assessment Theories

The Agency generally advances one or more of the following theories:

The taxpayer was a builder and made a taxable self supply that was not reported.
The new housing rebate was improperly claimed because the home was not used as a primary residence.
The rental rebate was unavailable because the property was not used for long term residential leasing.
The sale of the property constituted a taxable supply rather than an exempt sale of used residential housing.
Input tax credits claimed during construction were not available because the taxpayer was not engaged in a commercial activity.

Each theory has distinct legal elements and evidentiary requirements. A successful defence often involves narrowing the dispute to the precise statutory conditions at issue rather than engaging in broad arguments about fairness.

How to Fight an Assessment

A methodical approach begins with a detailed reconstruction of the timeline. Establish acquisition of land, commencement of construction, dates of substantial completion, occupancy, rental periods, marketing activities, and sale. Align each event with the relevant provisions of the Excise Tax Act.

Next, gather contemporaneous documents. Financing files may reveal representations made to lenders about intended use. Architectural plans, permits, and insurance applications can show whether the project was conceived as a personal residence. Communications with real estate agents may demonstrate that marketing began only after a genuine change in circumstances.

Witness evidence is often pivotal. Courts have accepted credible testimony from homeowners explaining why they built the property, how they used it, and why plans changed. Consistency between oral evidence and documentary records enhances reliability.

Expert valuation evidence may be required where the amount of tax depends on fair market value at the time of a deemed supply. Challenging the Agency’s valuation can materially reduce liability even if the underlying tax obligation is upheld.

Legal Arguments That Succeed

Several lines of argument have proven effective in appropriate cases.

A bona fide intention to occupy the property as a primary residence, supported by objective conduct, can defeat builder characterization or preserve rebate entitlement.

A genuine change in circumstances can explain an early sale without retroactively transforming the project into a commercial venture.

Failure by the Agency to establish the prerequisites for a deemed self supply, including the status of the taxpayer as a builder at the relevant time, can invalidate the assessment.

Procedural defects, including inadequate disclosure of assumptions or reliance on incorrect statutory provisions, can weaken the Minister’s position on appeal.

Appeal Process

A notice of objection must be filed within the statutory deadline, generally ninety days from the date of the assessment. The objection should set out a coherent narrative, identify the disputed issues, and include key supporting documents. Vague or purely rhetorical objections are less effective.

If the Appeals Division confirms the assessment, the taxpayer may appeal to the Tax Court of Canada. Informal procedure is available for smaller amounts, but complex new build cases often proceed under the general procedure given the quantum and evidentiary demands. Discovery, expert reports, and witness preparation become critical at this stage.

Settlement is common. The Agency may concede certain issues where the evidence is strong, particularly on valuation or penalty relief. Strategic engagement with Appeals can resolve the dispute without the cost of trial.

Penalties and Interest

In addition to tax, assessments often include gross negligence penalties. These require proof of conduct that is markedly different from ordinary negligence. Demonstrating that the taxpayer sought professional advice, made reasonable inquiries, or acted in good faith can defeat the penalty even if tax remains payable.

Interest is statutory and rarely waived, but relief may be available through the taxpayer relief provisions where extraordinary circumstances caused the non compliance or prevented timely action.

Practical Risk Management

For those planning a new build, proactive steps can prevent disputes. Maintain a clear record of intended use. Avoid premature marketing if the property is meant to be a residence. Obtain professional advice before renting or selling soon after completion. If circumstances change, document the reasons contemporaneously.

Conclusion

HST on new residential construction sits at the intersection of tax policy and human reality. People build homes for deeply personal reasons, yet the tax consequences are determined by rigid statutory rules that focus on objective indicators of use and intention. When an assessment arrives, the situation is serious but far from hopeless. Careful factual reconstruction, disciplined legal analysis, and credible evidence can transform the case. In many instances, taxpayers who genuinely built homes for personal use or long term rental can successfully defend their position or significantly reduce the assessment. The key is to treat the dispute as a technical legal matter requiring precision, not as an administrative misunderstanding that will resolve itself.

Call us Today to fight your HST Assessment:

Ummat Tax Law PC
(905) 336-8924