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Property flips come with tax consequences

Canadian property flippers should prepare to pay tax on all their profits, says Toronto real estate lawyer Daniel Bernstein.

While property speculators have often tried to characterize their sales as capital transactions, which are only subject to tax on half of the profits, Bernstein, a lawyer with Weltman Bernstein, says the Canada Revenue Agency (CRA) almost always views them differently.:

“The CRA will most likely tax any profit as an income rather than capital gains. As income, 100 per cent of profits are taxed, whereas only 50 per cent of the profit is taxed if it’s a capital gain,” he tells AdvocateDaily.com.

Sellers will also find themselves on the hook for HST charges on any profits if the CRA judges them as income, he says. For those who assigned their purchase agreement to a new buyer and got their deposit back, they may also take a hit for HST on that amount too, depending on the CRA’s position.   

In the event property sellers challenge the CRA’s characterization of the sale in court, Bernstein says a judge will take various factors into consideration when determining whether the profits should be taxed as income or capital.

“These include the length of time the property has been owned, the type of property purchased, how often the taxpayer has bought and sold other properties, the reasons the property was sold, the original intention of the purchaser, and whether any work was done to improve the property during its ownership,” he says.

In October last year, new reporting rules made life even more difficult for potential property flippers, Bernstein says. Taxpayers must now report the sale of a principal residence to the CRA, even though such sales are granted an exemption from any capital gains tax on the profits.

Under the old system, the exemption was more open to potential abuse, he says, since Canadians didn’t have to report any principal residence sales. 

As a result of the new rules, “the CRA can make further enquiries to determine if the sale was of a legitimate principal residence or in fact an income or capital producing transaction,” Bernstein says. “A taxpayer who fails to report a principal residence sale provides the CRA with ammunition to reassess or audit since the normal three-year limitation period will no longer apply.”

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