The CRA’s focus―real estate transactions
The Canada Revenue Agency (“the CRA”) often focuses its audit efforts on the real estate sector by regularly monitoring tax compliance on real estate transactions. The CRA’s focus is not about to change, at least not any time soon. The 2019 federal budget proposed to create a Real Estate Task Force. This new task force will essentially combine auditors and business-intelligence officers with specific knowledge, training, and expertise to scrutinize real estate transactions in which parties have failed to pay the required taxes.
Let’s take a closer look at the CRA’s focus and how it may impact you.
Reporting the sale of a principal residence
The principal-residence exemption is an income tax benefit that generally provides a Canadian taxpayer with an exemption from tax on the capital gain realized when selling their principal residence.
It is imperative that taxpayers are compliant with the rules for reporting the sale of a principal residence including proper compliance with respect to Schedule 3 and Form T2091 (IND) when it comes to their individual income tax return in the year of sale.
Reporting income from property flipping
Property flipping occurs when people buy and resell homes within a short period of time for a profit. The CRA wants taxpayers to know that income from these transactions must be reported on their tax returns properly. The CRA has found that some property flips are not reported at all or are reported incorrectly. Profits from flipping real estate are generally considered to be fully taxable.
The CRA considers there to be three main categories of property flipping:
- Professional contractors or renovators often buy and sell real estate at a profit;
- Speculators or middle investors often buy a property before construction is completed, then assign the right-to-sell clause in the contract to another speculator or to the final buyer; and
- Individual renovators often buy real estate, renovate it, and live in it for a short time before selling it for a profit and claiming the principal-residence exemption.
GST/HST issues in real estate
Builders face many technical GST/HST challenges due to the complexity of the rules applying to the construction and sale of real estate―particularly in the case of newly constructed residential property.
The self-assessment and rebate rules are complicated, imposing tax, interest, and penalties on the builder, if not reported correctly. The financial risk associated with incorrectly reporting GST/HST is particularly acute for builders of large rental-development projects involving tens of millions of dollars in fair market value. The numerous and complex GST/HST issues and rules will continue to be the focus of increased CRA audit activity.
Returns selected for audit
The CRA is intensifying compliance efforts in the real estate sector, particularly in areas where speculative activity has increased. While the task force was initially focusing on the greater Toronto and greater Vancouver areas, Muskoka will definitely be on their radar.
If you are a professional contractor or renovator, a speculator or middle investor, or an individual renovator, the CRA is paying close attention to your property sales. Make sure you are getting excellent guidance on your tax obligations related to your real estate investments.
Scott Conner is a Tax Partner at BDO Canada LLP. With over 15 years of experience as CPA, CA specializing in Canadian income tax, Scott helps a variety of individuals and private companies pay the least amount of tax possible with great tax planning strategies. He also specializes in planning for estates, trusts, and non-resident dispositions of real estate.