Due to the booming real estate market in Canada over the past year, the Canada Revenue Agency ("CRA") is scrutinizing the practice of "shadow flipping" or "assignment sales". This is a sales technique which involves the purchase of pre-built condos from a developer and subsequent sale to other buyers at higher prices before possession of the condo has been taken. By relying on an "assignment clause" in the agreement of purchase and sale, the potential purchaser can transfer or sell his interest in the property to another purchaser before the closing date at a profit.
This practice is very controversial and has drastically affected the housing market, contributing to the increase in home prices, particularly in Toronto and Vancouver, with the original sellers receiving less for their property, and the final purchaser potentially paying an inflated price for the same property. Transactions in both Toronto and Vancouver have seen the greatest incidence of these types of transactions, and are under the most scrutiny by the CRA. Vancouver also seeing another form of shadow flipping, which involves realtors finding multiple investors to be involved in the sale of a property in order for multiple buyers to profit while the realtor takes advantage of commission on each of the sales.
The CRA has gained interest in tax avoidance in real estate and is analyzing approximately 3,000 cases of shadow flipping transactions in Toronto to determine whether profits from such sales should be taxed as business income or as a capital gain. Generally speaking, any gain arising on the sale of real property are taxed as capital gains, with an effective tax rate of approximately 25%, significantly lower than the tax rate for business income.
We can help. Tax planning opportunities are available to assist Canadian taxpayers in optimizing their affairs to obtain a favourable tax outcome.
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