CRA Builder Audits: HST, Income Tax and How to Appeal

Oct 7

Written By Elias .

Short answer: If you build, substantially renovate or quickly resell homes, CRA can audit you under two separate laws at once: the Excise Tax Act (GST/HST) and the Income Tax Act. The two audits raise different issues, carry different penalties, and have different objection deadlines and collection rules. If you receive a proposal letter or a reassessment, the first 30 to 90 days matter most.

Why builders are a CRA audit priority

Real estate has been a CRA compliance focus for years. A single home sale can involve six figures of GST/HST, and CRA can compare land registry records and property transfers against what was reported on GST/HST and income tax returns. Many audits start with a sale the seller never thought of as a business transaction.

The people most often surprised by a builder audit are not large developers. They are individuals and small companies who built one or two houses, tore down and rebuilt a home, did a major renovation and sold, or assigned a pre-construction contract.

Who CRA treats as a "builder" for GST/HST

For GST/HST purposes, "builder" is a defined term and it is broader than most people expect. CRA's guidance says it includes a person who:

constructs or substantially renovates a house for sale;
buys a new house that has not yet been occupied, for the purpose of reselling it;
acquires an interest in a house under construction and completes it; or
converts non-residential property into housing.

An individual can be a builder even if they have another full-time job, if the activity is a business or an "adventure or concern in the nature of trade." The main exception is narrow: an individual who builds or substantially renovates a house to use as their primary place of residence is generally not a builder of that house, provided they did not claim input tax credits on it.

A renovation is "substantial" when 90% or more of the interior of the existing house is removed or replaced. The foundation, exterior and interior supporting walls, roof, floors and staircases are excluded from that calculation.

The GST/HST issues CRA looks for

1. HST not collected on the sale of a new or substantially renovated home. A builder's sale of new housing is taxable whether or not the builder is registered for GST/HST. The small supplier exception does not help here. Unregistered sellers report the tax on Form GST62. If no HST was charged on the sale, CRA will typically assess the seller for the tax, often calculated as a portion of the price received, plus penalties and interest.

2. The self-supply rule. If a builder rents out a newly built or substantially renovated home, or moves into it, the builder is generally treated as having sold it to itself at fair market value. HST is then owed on the full value of the house and land, even though no money changed hands.

3. Assignment sales. Since May 7, 2022, all assignment sales of newly constructed or substantially renovated residential housing are taxable for GST/HST purposes. HST is calculated on the assignment fee, not the full purchase price.

4. New housing rebates. Builders often credit the GST/HST new housing rebate to the buyer at closing. If the buyer did not qualify, for example because the home was not going to be their primary place of residence, CRA can deny the rebate. If the builder knew or ought to have known the buyer was not entitled to it, the builder can be held jointly liable for the rebate amount (ETA s. 254(5)).

5. Input tax credits. Builders who are registered can claim input tax credits for the HST paid on construction costs. CRA regularly denies them where invoices are missing, lack the supplier's GST/HST number, or relate to personal-use property.

The income tax issues CRA looks for

1. Business income vs. capital gain. Profit from building or renovating a house to sell is usually business income, fully taxable, rather than a capital gain taxed at the lower inclusion rate. CRA looks at factors such as your intention when you bought the property, how long you held it, how many similar transactions you have done, and whether you lived in it.

2. The residential property flipping rule. For sales on or after January 1, 2023, profit from selling a housing unit owned for less than 365 consecutive days is deemed to be business income. This includes assigning a right to buy a home. A deemed flip loses access to both the capital gains inclusion rate and the principal residence exemption, and any loss is deemed to be nil. There are exceptions for specific life events, including death, a new household member, separation, a threat to personal safety, serious illness or disability, job loss, a work or school relocation, insolvency, and destruction or expropriation of the property.

3. Principal residence claims. CRA routinely challenges principal residence exemption claims where the owner lived in a newly built home only briefly before selling it, or has a pattern of building, moving in and selling.

4. Unreported sales. If a sale was not reported at all, CRA will usually assess the full profit as business income and consider gross negligence penalties.

Penalties and how far back CRA can go

CRA can normally reassess income tax for individuals and Canadian-controlled private corporations within three years of the original assessment, and GST/HST within four years. Those limits do not apply where CRA can show the taxpayer made a misrepresentation attributable to neglect, carelessness or wilful default, or fraud.

Where CRA alleges the taxpayer knowingly, or in circumstances amounting to gross negligence, made a false statement or omission, it can impose a gross negligence penalty: 50% of the understated income tax (ITA s. 163(2)), and the greater of $250 and 25% of the understated GST/HST (ETA s. 285). CRA bears the burden of proving these penalties, and they are often worth contesting on their own.

How a builder audit usually unfolds

Contact and information requests. The auditor asks for purchase and sale documents, construction invoices, bank records, and details of how the property was used.
Proposal letter. Before reassessing, CRA usually sends a proposal letter setting out its position and giving you a short window, often 30 days, to respond. This is the best opportunity to correct the facts and the law before anything is assessed.
Reassessment. CRA issues a notice of reassessment for income tax, a notice of assessment for GST/HST, or both. Each has its own deadline to object.

How to appeal: deadlines that differ under each Act

Income tax (ITA): individuals must file a notice of objection by the later of one year after their filing due date for the year and 90 days after the notice of reassessment. Corporations have 90 days. CRA generally holds off on collecting disputed income tax until 90 days after it decides the objection.

GST/HST (ETA): you have 90 days from the notice of assessment to object, whether you are an individual or a corporation. Unlike income tax, CRA can keep collecting GST/HST while your objection is under review. Interest also keeps running. Many builders pay or arrange security for the disputed HST to stop interest and avoid collection action while the dispute proceeds.

Separate objections are needed. An objection to an income tax reassessment does not cover a GST/HST assessment, and vice versa. If both arrived, both need their own objection, filed on time.

Missed the deadline? You can apply for an extension of time, but the application must be made within one year after the original deadline expired.

Tax Court of Canada. If CRA confirms the reassessment, you have 90 days to appeal to the Tax Court. You can also appeal without waiting if CRA has not decided your objection within 90 days (income tax) or 180 days (GST/HST). Smaller appeals can use the Tax Court's simpler informal procedure: up to $25,000 of federal tax and penalties per year for income tax, and up to $50,000 in dispute for GST/HST.

What to do if you are being audited

Note every deadline on the letters you have received, including the proposal letter response date.
Gather the purchase agreement, statement of adjustments, building permits, construction invoices, financing documents, and evidence of how and when you used the property, such as utility bills, ID and mail at the address.
Write down why you bought, built or renovated the property and why you sold it, especially if a life event was involved.
Do not let the 90-day GST/HST objection period lapse while you wait for the income tax side to be resolved.
Get advice before responding to a proposal letter. The record you build at the audit stage carries through to the objection and any appeal.

How ZAF LAW can help

ZAF LAW represents home builders, renovators and property owners in CRA builder audits, GST/HST and income tax objections, and appeals to the Tax Court of Canada. We can review a proposal letter or reassessment, explain where you stand under both Acts, and respond to CRA on your behalf. Our pricing is clear and agreed up front, and you deal directly with the lawyer handling your file.

Book a free 15-minute discovery call

This article provides general information only and is not legal advice. Reading it does not create a lawyer-client relationship. The law and CRA practice change; this article is current as of October 2026. For advice on your situation, consult a lawyer.

Elias Zafiridis is an Ontario lawyer whose practice focuses on tax disputes with the Canada Revenue Agency. He has appeared before the Tax Court of Canada and has written on tax for Thomson Reuters Taxnet Pro, Investment Executive and Law360 Canada.