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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.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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