CRA Gets Tough On Real Estate Tax Cheats

Canada Revenue Agency (CRA) says it has taken significant steps to address tax cheating in the real estate sector.

The CRA says that, in recent years, it has increased its real estate audits, particularly in the Greater Vancouver and the Greater Toronto areas, where increased real estate speculation has heated the market. From April 2015 to March 2017, CRA audits of real estate transactions scooped up more than $329.4 million in unreported taxable income.

Protecting Tax Fairness and Integrity

The feds have taken other measures to curb tax cheating in real estate deals. Specifically, in a change aimed at making sure only eligible home owners claim a principal residence exemption from paying taxes on capital gains, you are now obliged to report the sale of principal residences to the CRA. Before the 2016 tax year, if the property was your principal residence for every year you owned it, you didn’t have to report the sale on your income tax and benefit return.

National Revenue Minister Diane Lebouthillier explains, “For many Canadians, buying a home is one of their proudest moments and represents one of their most important investments. Our Government has committed to protecting the fairness and integrity of the tax system for all Canadians, notably by cracking down on tax cheating in real estate transactions. This means that, without exception, every taxpayer abides by the same tax laws.”

The CRA says it plans to enhance its ability to combat tax evasion and avoidance by strengthening relationships with such key partners as provinces, territories and municipalities to expand, obtain and exchange information on real estate transactions. The agency also seeks the help of taxpayers. If you suspect that someone hasn’t reported income or GST/HST related to a real estate transaction, the CRA urges you to contact the National Leads Centre. Your identity won’t be disclosed, and you can provide information anonymously. Your tax advisor can provide you with the details.

In the midst of the recent heated real estate market, questions have been raised about what federal tax obligations the buyers and sellers of real estate must meet, and how the CRA ensures tax compliance on these transactions.

The Key Areas of Compliance Risk in Real Estate

There are five main areas of concern:

1. Questionable sources of funds. The sources of funds used to buy or maintain Canadian properties could be an unreported spring of money that was never taxed, either in Canada or another country. In certain circumstances, a large down payment on a home, or a property that is expensive to maintain, may indicate:

• Unreported income, if the lifestyle of the buyer isn’t compatible with the income reported,
• Tax evasion, or
• Purchase of real estate by a low-income person concealing a wealthy buyer.

The CRA can establish correlations between a taxpayer’s reported income and his or her lifestyle. The acquisition of expensive assets, such as a high-end home, without an obvious source of income, can be an indicator of potential unreported income earned from legal or illegal sources.

2. Property flipping. People, including real estate agents, who buy and resell homes in a short period for a profit are engaged in what is known as “property flipping.” There are three main categories of people engaged in this:

• Professional contractors who sometimes demolish or renovate a property.
• Speculators or middle investors who, for a profit, buy a property and assign the right to sell to another speculator or the final buyer. (This is called “shadow flipping” and it can occur many times between the first and final sale of a property. The original seller often doesn’t know that the property has been assigned to another buyer until the signing date.)
• Individuals who buy real estate, renovate it, live in it for a short time and sell it to claim the principal residence exemption several times in their lifetimes.

The CRA acquires and analyzes third-party data and has found that some flips aren’t being reported or are being reported incorrectly. The profits from flipping real estate are generally considered to be fully taxable as business income, but there may be circumstances where they’re considered capital gains. The facts of each case determine whether such profits should be reported as business income or as a capital gain.

3. Unreported GST/HST. Generally, the builder of a new or substantially renovated home must charge and collect GST/HST when the home is sold and report that tax to the CRA.

If a builder leases a new or substantially renovated home, the builder is deemed to have sold the home to himself or herself. The GST/HST is payable on the fair market value of the home, including the land value, and the builder must report that tax to the CRA.

Generally, the deemed sale of a new or substantially renovated home isn’t considered to have occurred if:

• A builder constructs or substantially renovates a home to be used primarily (more than 50%) as his or her place of residence, or a residence for a relative, and
• The builder hasn’t claimed an input tax credit to recover any GST/HST payable for the construction or renovation

There may also be GST/HST implications for flipping transactions, if a property is new or has been substantially renovated. In most cases, the sale of used housing is exempt from GST/HST. One of the main conditions for the new housing rebate to be available is that you must buy or build the home as your or a relative’s principal residence.

If you buy or build a new home in Canada, but your principal place of residence is outside Canada, the house in Canada would be a secondary place of residence and wouldn’t qualify for the new housing rebate.

Also, if the intention at the outset is to flip the property, the eligibility requirement for the new housing rebate isn’t satisfied, as confirmed by several recent court decisions.

4. Unreported capital gains on the sale of property. Selling a property for more than it cost generally leads to capital gain. In most cases, capital gains are taxable and must be reported. Whether the gain is taxable depends on whether the property is a principal residence or whether the seller is a resident or nonresident of Canada. Consult with your tax advisor.

5. Unreported worldwide income. Residents must report their worldwide income. Nonresidents have to report only Canadian-sourced income, unless a tax treaty provides otherwise. Your tax advisor can discuss how residency is determined.

If you are involved in real estate, regardless of the degree, consult with your tax advisor to help ensure you are complying with CRA rules. And if for any reason you reported such income incorrectly, you advisor can help you file an amended return.