With the real estate markets in Toronto and Vancouver growing robustly with prices reaching historical highs, speculators have pounced on the opportunity to realize quick returns on buying and selling condos and other real estate. The Canada Revenue Agency (“CRA”) has taken notice of this activity and is aggressively looking into whether these sales are being reported and, if they are, whether they are being reported correctly.
When selling a property, an individual can report the resulting gain (if any) as business income and pay tax on the full amount (not a desirable result in most cases), report as a capital gain (provided the property qualifies as capital property) and pay tax on half the gain (not a bad tax result compared to full rate business income) or report the transaction as a tax-free sale of their principal residence (most desired result in many cases). The CRA is concerned that individuals are incorrectly reporting what would otherwise be business income (fully taxable) as capital gains (half taxable) or as the sale of their principal residence (tax-free) in order to reduce their taxes owing, in some cases to nil. Be aware that a single sale can be viewed as an adventure in the nature of trade and subject to tax as business income.
In response, the CRA has done changed the reporting requirements for the sale of principal residences and second, they have embarked on a large auditing project targeting condo sales in the Vancouver and Toronto areas.
Beginning in 2016, individual taxpayers must report the sale of their principal residence on their personal income tax return. The information required to be reported includes:
- The address of the property;
- The date it was acquired; and
- The proceeds of disposition.
The Condo Flipping Project
Beginning in 2013, the CRA initiated a large auditing project reviewing the sales of condos in Toronto and Vancouver. The CRA identifies taxpayers who held a condo or home for a short period of time before selling it. In our experience, the ownership period during the pre-construction phase is typically ignored by the CRA. The CRA initiates the audit by sending the taxpayer a letter which usually includes a questionnaire. The questionnaire is quite detailed and requests information relating to any real estate the taxpayer may have owned during the period under review. The CRA is usually seeking to gather information relating to, but not limited to, the following:
- Where the property or properties are located;
- The reason(s) for purchasing the property or properties;
- Whether the taxpayer or anyone related to the taxpayer resided in the property or properties;
- Proof of residence (usually by way of proof of change of address with government agencies or correspondence sent to the property); and
- Mortgage details.
The CRA auditor assigned may also insist on an interview with the taxpayer After the auditor concludes their investigation, they will issue a proposal letter and give the taxpayer the opportunity to respond. After the taxpayer’s response, the auditor will issue a reassessment. Most likely, the auditor will find that the property sold was on account of income and charge gross negligence penalties for misreporting the sale of the property. Once the audit is concluded, the taxpayer will have the opportunity to object to the reassessment.
In the event that a taxpayer has inadvertently misrepresented (or not reported) the sale of a condo or other real estate, the Voluntary Disclosure Program may be an option. This program is not an option if the CRA has already issued a letter to the taxpayer.
 The project is colloquially referred to as the “condo flipping project,” however, the CRA is also targeting the sales of detached and semi-detached homes.