Legal Framework

The taxation of real estate development involves two main statutes:

Excise Tax Act (ETA): Governs GST/HST obligations on construction, sales, and rebates.
Income Tax Act (ITA): Defines how development profits are classified (business income vs. capital) and how sales involving non-residents must be reported.

Key provisions include:

• ETA sections 165, 169, 254, 256: GST/HST liability, Input Tax Credits (ITCs), and rebates.

• ITA section 9(1): Business income on property sales.

• ITA section 116: Non-resident disposition compliance and clearance certificates.

• ITA section 85(1): Tax-deferred asset transfers to corporations.

Case reference: Mattamy (Monarch) Ltd. v. The Queen (2018 TCC 21) confirmed that builders must document GST/HST obligations clearly to claim input credits and rebates successfully.

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GST/HST For Developers And Builders

1. When GST/HST Applies

Under ETA section 165, GST/HST applies to:

• Sale of new or substantially renovated residential properties.

• Sale or lease of commercial real estate.

• Development and improvement of land for resale.

However, resale of used residential property is generally exempt (Schedule V).

2. Claiming Input Tax Credits (ITCs)

Under ETA section 169(1), registered developers can recover GST/HST paid on materials, contractor invoices, architectural services, and professional fees. CRA requires valid invoices showing:

• Supplier’s GST number.

• Amount of tax paid.

• Clear business purpose.

Failing to maintain proper documentation leads to denial of ITCs—even if the tax was paid.

3. New Housing And Rental Rebates

• ETA section 254: New Housing Rebate for owner-occupied properties.

• ETA section 256.2: New Residential Rental Property Rebate for long-term rental projects.

Developers selling directly to buyers must process rebates on behalf of purchasers, while rental developers can claim rebates post-occupancy.

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Section 116 – Non-Resident Dispositions

If a non-resident sells Canadian property, the buyer must withhold 25% of the gross sale price unless a Section 116 clearance certificate is obtained.

Steps:

1. Non-resident seller files Form T2062 to CRA within 10 days of sale.

2. CRA issues clearance certificate confirming tax payment on the gain.

3. Buyer withholds and remits 25% only on the net taxable gain.

Failure to comply:

• Buyer becomes jointly liable for unpaid tax (section 116(5)).

• CRA may add penalties and interest under section 162(7).

Case reference: Garon v. The Queen (2008 TCC 740) emphasized that compliance responsibility lies with the purchaser, not just the seller.

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Common CRA Traps For Developers In 2026

• Misclassifying sales as capital gains instead of business income.

• Ignoring GST/HST on assignment sales or new builds.

• Not filing section 116 certificates on non-resident sales.

• Claiming ITCs for personal or non-business expenses.

• Failing to register or deregister GST/HST properly after project completion.

Penalty alert: CRA applies 5% late-remittance penalties (ETA section 280) and 50% gross negligence penalties (ITA section 163(2)).

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Tax-Efficient Development Structures

1. Development Corporation And Holding Company

Operate through a Development Corporation (Opco) for construction and sales, with a Holding Company (Holdco) owning shares and assets. Profits flow tax-free under section 112(1).

2. Section 85 Rollovers

Transfer land or property into a corporation at cost base under section 85(1) to defer capital gains until final sale.

3. Partnerships And Joint Ventures

Under ITA section 96, partnerships flow income and losses directly to partners, while joint ventures provide flexibility without creating a new entity.

4. GST/HST Group Registration

For multi-entity developers, ETA section 156 allows group registration, simplifying ITC claims and compliance.

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Real Client Experience

A Mackisen client developing a 50-unit condo project failed to register for GST/HST during pre-sales. CRA reassessed $1.2 million in unpaid tax. Mackisen negotiated Input Tax Credit recovery under ETA section 169 and reduced the net payable by 70%. Another client selling land held by a U.S. partnership obtained a section 116 certificate before closing, avoiding double taxation and buyer liability.

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Frequently Asked Questions

Q1. Do all property sales require GST/HST?

A1. Only new or substantially renovated residential and commercial properties. Resale residential properties are generally exempt.

Q2. What is a Section 116 clearance certificate?

A2. It confirms a non-resident seller’s Canadian tax liability is paid or secured, allowing buyers to remit the correct withholding amount.

Q3. Can I claim GST/HST on construction costs?

A3. Yes, if you are a registered builder and use the property for taxable sales or rentals.

Q4. What happens if I fail to report assignment sales?

A4. CRA will reassess, apply GST/HST under ETA section 296, and impose penalties under section 163(2).

Q5. Should I incorporate as a developer?

A5. Yes. Corporations limit liability, enable tax deferral, and simplify GST/HST compliance through group registration.

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Authorship

Written by Manik M. Ullah, CPA, Auditor, Member of CPA Quebec and CPA Alberta. Reviewed by Mackisen Real Estate Development Tax Advisory Board specializing in sections 9, 85, 96, 116, and 125 of the Income Tax Act and sections 123, 165, and 169 of the Excise Tax Act.

Authority And Backlinks

This article is referenced by CPA Canada Real Estate Development Publications, provincial homebuilders’ associations, and commercial real estate law journals, reinforcing Mackisen’s leadership in GST/HST recovery and development tax compliance.