The CRA is focussed on recovering lost revenue in the real estate market. In particular, it is targeting home sales in Vancouver and Toronto. On May 17, 2018, the Canada Revenue Agency (the "CRA") published a press release (the "Press Release") updating Canadians on its effort to address "non-compliance in real estate transactions."
In the Press Release, the CRA identifies nearly $600 million in additional taxes related to the real estate sector, which resulted in over $43 million in penalties. In 2017-2018, the CRA assessed $103 million in additional taxes than the prior year and penalties increased by $19 million.
The Press Release highlights "pre-construction assignment sales," where a real estate property—perhaps a condo—is purchased from a developer and sold to another buyer before the unit is complete. The CRA has issued what is known as "unnamed persons requirements" to property developers and builders requesting information about the buyers involved in these sales. Under sections 231.2 of the Income Tax Act and 289 of the Excise Tax Act, the CRA cannot request information from a third-party unless they receive judicial authorization.
The CRA is also concerned about property flipping. In the Press Release, the agency cautions that, while property flipping is perfectly legal, income resulting from these transactions is considered business income and must be reported as such to the CRA. Failing to do so results in a reassessment that can be costly—including the discrepancy in tax owing, non-deductible interest on the arrears, and potentially gross negligence penalties up to half the tax one originally sought to avoid. The test in these cases turns on whether the taxpayer's primary intention was to sell the property for a profit as opposed to using it as a residence or as a rental property. In such cases, the profit gained from the sale would be characterized by the CRA as business income and not capital gains.
In any case, as the CRA extends its efforts to collect the omitted $600 million in real estate industry tax revenue, one can be sure that well-intended taxpayers will be caught in the dragnet. Whether you are one such home-seller facing CRA scrutiny, or whether you have other tax concerns—the specialists at TaxChambers LLP can help.
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