CRA targets real estate transactions

CRA Targets Real Estate Transactions!

The real estate market in Vancouver and Toronto has grown sustainably over the past few years. The average price of a detached home in Toronto has increased 21% from July 2015. BC has already introduced a new 15% real estate tax effective August 2016 on foreign homebuyers. The purpose of the tax was to address low vacancy rates and high real estate prices in Metro Vancouver. With the introduction of this new tax, home sales in Pacific Coast city fell almost 51% in the first two weeks of August 2016 from the same period a year ago.

Finance Minister Bill Morneau further introduced new measures on October 3, 2016 to crackdown on non-residents claiming principal residence exemptions on sale of real estate. The new measures will make it mandatory to report any dispositions of all capital property starting in 2016, including principal residences. The penalties for failure to report the disposition can be as high as $8,000/year.

With all these new measures, it is obvious that the CRA recognizes that tax evaders are not correctly reporting their income. A Global and Mail article[1] recently revealed that the CRA has recovered $240 million in real estate tax fraud and additional $12.5 million in penalties over the past 18 months.

With the new focus on real estate and individuals wanting to invest in real estate, it is imperative to understand the compliance and taxation of real estate transactions.

The Globe and Mail article discusses, four areas that are currently being pursued by the CRA:

  • Unreported worldwide income – remember that as a Canadian resident, you are taxed on your worldwide income – which includes any rental, business, pension income. Generally, you are able to claim a foreign tax credit on the foreign taxes paid if there is a tax treaty in place.
  • Property “flipping” – when you purchase a property with an intention of renovating it and selling it short-term, the disposition may not qualify for capital gains tax, but rather taxed as regular income.
    Under-reporting of capital gains from home sales – remember that the principal residence exemption is one per family (assuming no adult children).
  • Under-reporting of Goods and Services Tax (GST) on sales of new homes – if you have completed a “substantial renovation” on a property, you will have GST/HST issues to consider. You may be considered a “builder” if you sell a house that you substantially renovated and hence may have to collect HST from the purchaser or self-assess the HST if you are to rent the property subsequently. The rules surrounding this are very complicated. Please speak to a trusted advisor if you are considering this proposition.
  • The “source of funds” to buy or maintain and renovate a property – the CRA is looking for tax evaders to ascertain whether illegal activities were carried out to be able to purchase the property. Where is the money coming from to be able to pay for the renovation or down-payment?

One statistic discussed in the Globe and Mail article is that the CRA audited nearly six times as many files and recovered seven times more money in Ontario than in British Columbia between April, 2015, and September, 2016. Ontario’s population is only three times higher than British Columbia’s!

To avoid unintended tax consequences and CRA audits, it is imperative to understand the tax consequences of owning real estate and the related issues. Contact Harpreet Wadehra today to discuss your particular situation in more detail.

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