Builders And House Flippers Beware! ' Federal Court Of Appeal Dismisses House Flipper's Claim For Principal Residence Exemption

• Published date: 09 December 2021
• Subject Matter: Litigation, Mediation & Arbitration, Real Estate and Construction, Tax, Trials & Appeals & Compensation, Real Estate, Sales Taxes: VAT, GST
• Law Firm: Dentons
• Author: Ms Hannah Bourgeois

Builders and house flippers attempting to profit off the supercharged real estate market in Canada should all be aware of the decision in Wall v Canada, 2021 FCA 132, in which the Federal Court of Appeal dismissed the taxpayer's appeal of the Tax Court's decision to deny a claim for the principal residence exemption on the sale of three real properties, treat the sales as business income rather than capital gains, subject the sales to GST/HST, and impose gross negligence penalties.

Background and Reassessment

The taxpayer in Wall was a licensed real estate agent who had significant experience developing real estate. In 2006, 2008, and 2010, the taxpayer developed and sold three residential properties, claiming the principal residence exemption in each case. The taxpayer did not report any income nor charge GST/HST in connection with these sales. The CRA reassessed the taxpayer to deny his claim for the principal residence exemption for each of the properties, and to include the full amounts of the properties as business income for the purposes of income tax and GST/HST.

The Tax Court

The main issue at the Tax Court was whether the gains on the three properties should be taxed as a capital gain as claimed by the taxpayer, or on account of business income. A secondary issue was whether the taxpayer was a "builder" under the Excise Tax Act ("ETA"), such that the dispositions were subject to GST/HST.

The taxpayer argued that he resided in each of the properties with his son as a permanent residence and therefore was entitled to the principal residence exemption. The Tax Court was unpersuaded for several reasons. One reason was that the taxpayer retained very little documentation with respect to the properties, including evidence documenting the development process or demonstrating that the taxpayer and his son ever lived in the properties. The Tax Court also found the taxpayer's testimony to be "largely unreliable, self-serving, and evasive."

The Tax Court held that the property sales were on income account. The court analyzed the factors for determining whether a gain is on income or capital account as summarized in Happy Valley Farms Ltd. v. Minister of National Revenue, [1986] 2 CTC 259 (FCTD):

1. The nature of the property sold;
2. The length of the period of ownership;
3. The frequency or number of similar transactions;
4. Work expended on or in connection with the property;
5. The circumstances that were responsible for the sale of the property; and
6. Motive.

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