Lawyers Financial

Sending condo sellers for tax advice a prudent move

In some Canadian markets, the practise of buying prebuilt condos and flipping them once completed has been a profitable activity — however, as Toronto tax litigation lawyer David J. Rotfleisch writes in Lawyers Weekly, real estate lawyers acting for sellers should be recommending these clients seek tax advice.

As Rotfleisch, founding tax lawyer at Rotfleisch & Samulovitch Professional Corporation, explains, buying and selling a condo, even once, is almost always considered to be what the Canada Revenue Agency (CRA) calls an “adventure in the nature of trade” — a one-off transaction that is a business venture rather than a capital transaction — and is 100 per cent taxable as business income, rather than 50 per cent taxable as a capital gain.

“Even worse, many condo flippers sell the property without ever taking title to the unit and never report any gain. Since they just sell the purchase agreement and don’t appear on title they assume that CRA won’t find them. They are very mistaken. While a real estate lawyer is generally not providing tax advice, being aware of what pitfalls your clients face and being proactive in sending them for tax advice is an important value added service,” writes Rotfleisch.

For example, he says, the CRA has an ongoing audit project specifically aimed at condos in active real estate markets, where tax auditors look at purchasers of new condos from developers by way of developer sales records to ensure that gains have been properly reported. 

“CRA is generally right that a failure to report income from buying and selling a condo is tax evasion. Trying to report it as a capital gain instead of regular income may constitute tax evasion as well although that is a more nuanced situation and mens rea may well be lacking,” writes Rotfleisch.

And the penalties can be significant. The Income Tax Act sets out penalties for tax evasion of a fine of between 50 and 200 per cent of tax evaded and a jail term of up to two years. Even if a condo flipper is not charged with tax evasion, the profits on the sale may be subject to gross negligence penalties, says Rotfleisch.

While the sale of a principal residence may be exempt from income tax, as Rotfleisch explains in the article, this does not apply to condo flippers.

“Flippers think that living in the condo allows them to claim the exemption and avoid all taxes on their profits. They move into the condo and live there for a while, then sell it and claim the principal residence exemption. They often do this over again. However, they are not entitled to the exemption. Merely residing in the property does not automatically mean it was a capital property and eligible for the principal residence exemption. There are cases directly on point. The motivation for the purchase is relevant,” he says.

Not only does a purchaser need to be able to prove he or she really lived there, but they may have to show that selling for a quick gain was not the purpose of the purchase, writes Rotfleisch.

For condo flippers who have not reported gains, Rotfleisch explains that the CRA has a policy called the Voluntary Disclosures Program to encourage taxpayers to come forward to report any previously unreported income, GST or to file returns that were not previously filed.

“This means they will not undertake criminal prosecutions or apply civil penalties, including late filing penalties, on any voluntary disclosures. This policy applies even to someone who has committed deliberate tax evasion, including failure to declare income such as through condo flipping,” he writes.

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