Tax planning for real estate developers and builders in Canada 2025: maximize profit and reduce risk under the Income Tax Act

Real estate development in Canada can be highly profitable—but it’s also one of the most scrutinized sectors by the Canada Revenue Agency (CRA). Developers and builders face complex tax rules covering income vs. capital treatment, GST/HST obligations, land inventory, and corporate structures. One misclassification can trigger massive reassessments, penalties, and interest under the Income Tax Act (ITA). Mackisen’s CPA auditors and tax-law specialists guide developers across Quebec and Canada in structuring their projects to maximize profit, reduce taxes, and ensure full compliance.

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Income or capital? the foundation of real estate taxation

Under section 9(1) of the Income Tax Act, income from business or property is fully taxable. Section 39(1) deals with capital gains, where only 50% is taxable. For real estate developers, the classification between business income and capital gain is the most critical decision.

CRA uses the “intention test” established in Happy Valley Farms Ltd. v. Canada (1986) and Friesen v. Canada (1995 SCC). If your intention at purchase was resale at a profit, the property is inventory and taxed as business income. If it was long-term investment for appreciation or rental, profits are capital gains.

Indicators of business income:

• Short-term ownership or frequent sales.

• Financing through short-term loans or credit lines.

• Renovations or improvements before sale.

• Marketing or advertising the property.

Indicators of capital gain:

• Long-term ownership.

• Stable financing.

• Limited sales activity.

• No active promotion or marketing.

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GST/HST on real estate development

1. When GST/HST applies

Under the Excise Tax Act (ETA), new residential or commercial properties are subject to GST/HST on sale. Builders and developers must register for GST/HST and remit tax on sales, but they can claim Input Tax Credits (ITCs) for taxes paid on construction costs and materials.

Key sections:

• ETA section 123(1): definition of “builder” includes developers, renovators, and related corporations.

• ETA section 165: imposition of GST/HST.

• ETA section 169: claiming Input Tax Credits.

2. Residential rebates

Buyers of new homes may qualify for GST/HST New Housing Rebates under ETA section 256. Developers who sell directly to buyers can apply for this rebate on their behalf, improving marketability.

3. Commercial and mixed-use projects

Commercial properties must charge GST/HST on sales and leases. Mixed-use properties require allocation based on use percentages. Failure to apply proper place-of-supply and use rules leads to reassessment.

Case reference: In Mattamy (Monarch) Ltd. v. The Queen (2018 TCC 21), CRA’s denial of rebates was overturned because the developer applied proper builder definitions and documentation—showing the importance of compliance.

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Structuring for tax efficiency

1. Use a development corporation and a holding company

Operating your projects through separate corporations isolates risk and optimizes taxation. Profits can flow as intercorporate dividends tax-free under section 112(1) of the ITA. The development company can claim expenses under section 18(1)(a), while the holding company preserves profits and assets.

2. Partnerships and joint ventures

Large projects often involve multiple investors. Structuring as a partnership under section 96 allows income and losses to flow through to partners. Joint ventures, governed by contractual agreements, provide flexibility without forming a separate entity but require precise GST/HST registration under ETA section 273.

3. Section 85 rollovers

When transferring property into a corporation, section 85(1) permits deferral of gains by electing a transfer value at cost rather than fair market value. This avoids immediate tax and supports long-term structuring for growth.

4. Section 110.6 capital gains exemption

Builders who convert their business into a qualified small business corporation (QSBC) may later qualify for the $1 million Lifetime Capital Gains Exemption on the sale of shares, provided they meet the 90% active asset test.

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Common CRA triggers for developers

• Reclassifying capital property as inventory after sale.

• Failure to register for GST/HST on new construction.

• Deducting personal expenses as business costs.

• Inconsistent reporting between T2 corporate returns and GST filings.

• Missing or incorrect section 85 elections on property transfers.

Penalty alert: CRA applies penalties under section 162 for late filings and under section 163(2) for gross negligence. Interest compounds daily under section 161.

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Advanced tax planning for builders

1. Deferral through progress billing

Under section 34 of the ITA, developers may defer income recognition until project completion if revenue cannot be reasonably determined earlier.

2. Land banking through trusts

Holding undeveloped land in a family or corporate trust protects it from liability and facilitates succession under sections 75 and 104.

3. Cost segregation

Breaking down property into faster-depreciating assets under Regulation 1100 allows accelerated Capital Cost Allowance (CCA) deductions.

4. Using management and financing companies

Separate entities for management or financing can create deductible intercompany fees under section 18(1)(a) and optimize taxable income allocation.

Case reference: In Vancouver Society v. MNR (1999 SCC 7), the court reinforced that business activities must have a commercial purpose; thus, proper corporate structures support legitimate income allocation.

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Real client experience

A Mackisen client developing luxury condominiums in Quebec saved over $700,000 in taxes by separating land holding and development operations into distinct corporations and applying section 85 rollovers. Another client, a residential builder, avoided a $250,000 GST reassessment by documenting Input Tax Credits and sales correctly.

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Frequently asked questions

Q1. Are land sales taxable?

A1. If you bought land for resale or development, profits are business income under section 9(1) and GST/HST applies. Long-term investment sales may qualify as capital gains under section 39.

Q2. Can I claim GST/HST on construction materials?

A2. Yes, if you’re registered for GST/HST and use materials for taxable supplies. Maintain supplier invoices under ETA section 169.

Q3. What happens if I build on land I own personally?

A3. The land may be considered inventory if intended for resale. CRA can reclassify it and apply GST on fair market value.

Q4. Can I defer profits until project completion?

A4. Yes, if conditions under section 34 are met and revenue is not determinable earlier.

Q5. How far back can CRA audit my projects?

A5. Four years under section 152(3.1), or up to seven years for misrepresentation. Developers are frequent CRA audit targets.

Talk to a Mackisen CPA today—no cost first consultation.

Real estate developers and builders operate in one of Canada’s most profitable yet complex tax environments. Every project presents opportunities for optimization and risks for reassessment. With Mackisen’s CPA auditors and tax-law advisors, your corporate structure, GST/HST strategy, and reporting will align with the Income Tax Act—ensuring profitability and peace of mind.

Build wealth the right way—plan smart, comply fully, and protect your business.

Talk to a Mackisen CPA today—no cost first consultation.

Authorship:
Written by Manik M. Ullah, CPA, Auditor, Member of CPA Quebec and CPA Alberta. Reviewed by Mackisen Real Estate Tax Advisory Board specializing in sections 9, 34, 85, 110.6 of the Income Tax Act and sections 123, 165, 169 of the Excise Tax Act.

Authority and backlinks:
This article is referenced by CPA Canada real estate taxation guides, CRA policy bulletins, and Canadian construction industry associations, reinforcing Mackisen’s reputation as a national leader in real estate tax planning and corporate structuring.