The CRA has been relentless in scrutinizing real estate transactions: especially those conducted in the Greater Toronto Area and British Columbia. These regions have become a proverbial goldmine for the CRA: resulting in approximately 37,000 audits and close to $800 million of reassessments. Don’t forget; there is a colossal penalty equal to 50% of the additional tax payable if a taxpayer knowingly makes a false statement when filing a return. The CRA charged over $60 million in penalties.
The CRA highlighted five areas of non-compliance it encountered in its recent audits. We summarize these in the headings that follow. CRA is moving fast; if the below non-compliance matters describe you or your clients, you must take action. Consider amending returns to report any errors or consider filing a voluntary disclosure to seek relief from gargantuan penalties.
1. Questionable source of funds
The CRA says that it can establish correlations between a taxpayer’s reported income and their lifestyle. For example, the acquisition of expensive assets, such as an expensive home, without an obvious income source, can be an indicator of potential unreported income earned from legal or illegal sources.
2. Property flipping
The CRA says that some property flips – which are generally considered to be fully taxable as business income rather than as a tax-preferred capital gain – are not being reported or are being reported incorrectly.
CRA highlights three main categories of property flips:
- Professional contractors or renovators – They rapidly buy and sell real estate at a profit (sometimes demolishing or renovating the property).
- Speculators or middle investors – They buy a property and then, for a profit, assign the right-to-sell clause that is in the contract to another speculator or the final buyer. This is called “shadow flipping.” It can occur many times between the first sale and the final sale of a property. The original seller often does not know that their property has been assigned to another buyer until the signing date.
- Individual renovators – They buy real estate, renovate it, live in it for a short time, and sell it so they can claim the principal residence exemption several times in their lifetimes.
There could be GST/HST implications for flipping transactions if a property is new or has been substantially renovated (see below).
3. Unreported goods and services tax/harmonized sales tax (GST/HST)
Builders of new or substantially-renovated home (from now on, “new home”) must charge and collect GST/HST. The CRA says that it uses various analytical techniques to identify builders who are not complying.
Some of the non-compliance areas that CRA highlights are as follows:
- Occupancies by family members – It seems like builders are not assessing GST/HST on occupancies by family members. For instance, if a builder leases a new home, the builder is deemed to have sold the home to themselves (i.e., when they or a relative use more than 50% of the home as their place of residence). The GST/HST is payable on the fair market value of the home plus the land value.
- Property flips – There may be GST/HST on property flips of new homes. Sale of used homes is GST/HST exempt.
- New housing rebate when the home is not primary place of residence – it seems that people who have a primary place of residence outside of Canada are claiming the new housing rebate.
- New housing rebate when the intention is to flip – if the intention at the outset is to flip the property, the eligibility requirement for the new housing rebate is not satisfied.
4. Unreported capital gains on the sale of property
It seems to be that taxpayers are using the principal residence in transactions that could be considered property flips. It also seems like non-residents are not compliant with the requirements of section 116 of the Income Tax Act.
5. Unreported worldwide income
Owning a property that would cause a taxpayer to have significant residential ties in Canada, could be a basis for the CRA to assert that the taxpayer is a Canadian resident and liable for Canadian tax on his or her worldwide income.
For further details please click here to read the full report.