Liberal GST/HST Reform Proposals: Real Estate Compliance, Risks, and Market Impact

The Liberal Party of Canada’s campaign proposals to reform the Excise Tax Act (ETA) GST/HST framework introduce 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 compliance what-ifs, practical impacts on stakeholders, and broader implications for the real-estate sector—equipping taxpayers, builders, investors, and advisers 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 ETA s. 123(1) the definition now captures individuals or entities engaged in construction or substantial renovation even if it is not their primary business—ensnaring one-time renovators or flippers engaged 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 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 broader authority to scrutinize transactions, focusing on unreported GST/HST from flips and non-compliant rebate claims.
• Mandatory registration: Certain property transactions must now be registered for GST/HST under s. 241, with penalties for non-compliance.

These reforms aim to protect revenue and curb speculation, but they also raise 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:

• What if you are deemed a builder unexpectedly? The expanded definition in s. 123(1) means a one-off renovator who sells could be required to register for GST/HST (s. 241). Failure may trigger penalties and reassessments, as in Gerlings v. Attorney General of Canada (2024 FC 1892), where the CRA retroactively issued business numbers.
• What if a flip is misclassified? Sellers who assume an exemption under Schedule V, Part I, s. 2 risk reassessment under s. 165(1) if GST/HST should have been collected. CRA’s focus on short-term holdings in Toronto and Vancouver heightens this risk.
• What if rebates are denied post-closing? Buyers banking on s. 254 rebates may lose them if the CRA decides the property was not a primary residence. Cheema v. Canada (2018 FCA 45) shows how co-ownership or bare-trust arrangements can void claims and leave buyers with unexpected tax.
• What if audit scrutiny increases? CRA real-estate crackdowns recovered $2.2 billion in assessments from 2015-2022. Penalties under s. 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, and consider proactive registration if you engage in frequent transactions.

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

Substantial renovation—defined in s. 123(1) as removing or replacing “all or substantially all” (≈ 90 %) of a building except structural elements—triggers self-supply rules in s. 191. Upon completion, a deemed sale and repurchase at fair-market value imposes GST/HST even on one-time renovators deemed builders. A limited exemption in s. 191(5) applies to individuals renovating their own primary residence without claiming input-tax credits.

Planning Tip: Keep before-and-after photos, contractor invoices, and plans to verify the 90 % threshold. Consult a tax professional before major renovations to confirm builder status and self-supply consequences.

Rebates and Exemptions: Opportunities and Pitfalls (ETA ss. 254, 256.2)

• GST/HST New Housing Rebate (s. 254): Up to $6,300 federally for homes ≤ $350,000 (phase-out to $450,000) plus provincial components (e.g., Ontario up to $24,000). Strict occupancy and legal-title rules apply—beneficial ownership alone is insufficient.
• New Residential Rental Property Rebate (s. 256.2): Applies to units leased ≥ 12 months; no price threshold but a two-year filing deadline.
• Principal-residence misconception: The capital-gains exemption under the Income Tax Act does not relieve GST/HST arising from substantial renovations.

Planning Tip: Ensure legal titleholders satisfy occupancy for housing rebates, secure ≥ 12-month leases for rental rebates, and file within deadlines to avoid forfeiture.

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

Under ITA s. 45, changing property use (personal ↔ income-producing) triggers a deemed disposition and potential capital gain plus GST/HST effects. Elections under s. 45(2) or (3) can defer gains but limit capital-cost-allowance claims.

Planning Tip: File timely elections to defer capital gains and review GST/HST impacts when properties change use—especially during renovations or repurposing.

Audit Triggers and CRA Enforcement Trends

The CRA has intensified real-estate scrutiny: 62,000 audits in 2022-23 generated $14.3 billion in fiscal impact, including $298.9 million in penalties in Ontario and B.C. (2015-2022). Key triggers are short-term flips, lifestyle-income gaps, and incorrect rebate claims.

Planning Tip: Retain contracts, permits, invoices, and occupancy proof for at least six years. Consider voluntary disclosure to reduce penalties if errors are discovered.

Impact on Stakeholders: Winners and Losers

• Individual buyers / first-time homeowners: Stricter rebate criteria raise upfront costs, though provincial rebates help.
• Property flippers / speculators: Mandatory GST/HST and audits squeeze margins; capital-gains treatment may be lost if profits are business income.
• Builders / developers: Large firms can offset tax with input-tax credits (s. 169), but small-scale renovators risk unexpected builder liabilities.
• Rental-property investors: Tougher rental-rebate rules may deter investment and squeeze supply.

Planning Tip: Match compliance strategy to your role—secure long-term leases for rental units, confirm rebate eligibility for buyers, and specify GST/HST clauses in flip contracts.

Broader Implications for the Real-Estate Market

Higher tax burdens on speculative deals could cool hot markets such as Toronto and Vancouver, aiding anti-inflation goals. Conversely, reduced rebates and greater compliance costs may deter first-time buyers and slow housing starts. Smaller players, lacking compliance resources, bear disproportionate risk.

Takeaways

1. Compliance is non-negotiable: Stricter enforcement demands proactive registration and accurate reporting.
2. Know the definitions: Builder status and substantial-renovation thresholds drive obligations.
3. Use rebates strategically: Tight rules require meticulous documentation and timely filing.
4. Prepare for audits: Robust records and voluntary disclosures mitigate penalties.
5. Anticipate market shifts: Rising tax costs will influence prices, rental supply, and buyer behavior.

DISCLAIMER: This article is for general information only and does not constitute legal or tax advice. Readers should consult qualified professionals for guidance tailored to their circumstances.