A Canada Revenue Agency ("CRA") audit initiative is targeting taxpayers who have recently sold condominium units they did not occupy or occupied for only a short period of time (the "CRA Condo Project").
The CRA is reassessing some of these dispositions on the basis that the condo was sold in the course of business, treating the profit as income (instead of capital gains) and, in some cases, assessing gross negligence penalties under subsection 163(2) of the Income Tax Act. In doing so, the CRA may be incorrectly reassessing some taxpayers whose gains are legitimate capital gains and that may be subject to the principal residence exemption (click here for a discussion of the principal residence exemption).
Consider this example. A taxpayer signs a pre-construction purchase agreement for a condo in 2007. In 2009, the unit was completed and occupied by the taxpayer, before the entire development was finished and registered in land titles. Land titles registration occurs in 2010, but shortly thereafter the taxpayer sells the condo for a profit. Ordinarily, one would conclude the condo was held on account of capital and the gain would be at least partially exempt from tax on the basis that condo was the taxpayer's principal residence. The CRA may be inclined to reassess on the basis that land title records show the taxpayer on title for only a short time, as though the taxpayer had intended to merely "flip" the condo rather than reside in it.
This assessing position may be incorrect because the buyer of a condo does not appear on title until the entire condominium development is registered. In fact, several years can pass from the date of signing the purchase agreement to occupancy to land titles registration – and, accordingly, the taxpayer's actual length of ownership will not be apparent from the land title records.
This type of situation could cause serious problems for some taxpayers. If a taxpayer is audited and subject to reassessment on the basis that their entire gain should be taxed as income, the taxpayer will need to gather evidence and formulate arguments in time to respond to an audit proposal letter within 30 days, or file a Notice of Objection within 90 days of the date of a reassessment.
Taxpayers could respond to such a reassessment by providing evidence that they acquired the condo with the intent that it would be their residence, and that the subsequent sale was due to a change in life circumstances. Taxpayers may wish to gather the following evidence to support such claims:
- Purchase and sales agreements;
- Letter or certificates granting permission to occupy the condo;
- Proof of occupancy, such as utility bills, bank statements, CRA notices, identification (such as a driver's license) showing the condo as a residence; or
- Evidence of a change in life circumstances which caused
the condo to no longer be a suitable residence, including:
- Marriage or birth certificates;
- A change of employer or enrollment in education that required relocation; or
- Evidence showing the taxpayer cared for a sick or infirm relative, or had a disability that precluded using a condo as a residence.
Taxpayers should be prepared to provide reasonable explanations for any gaps in the evidence. If a taxpayer wishes to explore how best to respond in the circumstances, they should consult with an experienced tax practitioner.
For more information, visit our Canadian Tax Litigation blog at www.canadiantaxlitigation.com
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