Real Estate Transactions Under Scrutiny at CRA

The penalties have been huge on the over 21,000 files CRA has audited from April 2015 to March 2017: over 885 penalties totalling $17 Million were applied on close to $330 Million in unreported income, mostly in the Toronto and Vancouver markets.

But beware: even more enhanced compliance procedures are coming according to a June 16 news release. Here’s what you need to know:

CRA is particularly concerned about five areas of non-compliance specific to real estate transactions. Over and above the taxes due, as well as fines and penalties charged on these kinds of transactions, those who knowingly make false statements can be subject to an additional penalty of 50% of the additional taxes payable.

Of the five types of real estate transactions that CRA is paying close attention to in order to uncover incidents of non-compliance, be particularly aware of these two types of transactions, as they are among the most common:

• Property flipping: The proceeds from buying and selling a home for profit are fully taxable, even if you lived in it at some time during the year. CRA has been acquiring and analyzing third-party data to catch those who should be reporting the flip as income, with a special focus on professional contractors or renovators: shadow-flippers, who assign the right-to-sell clause to another buyer; and individual homeowners who repeatedly buy real estate, renovate it, live in it for a short period of time and claim the principal residence exemption several times in their lifetimes. Worse, on top of penalties due for these kinds of transactions, you may also be subject to a GST/HST liability, as explained below.
• Unreported GST/HST on the sale of a new or substantially-renovated home and the new housing rebate. A builder of a new or substantially-renovated home must charge and collect GST/HST. If that property is leased, the builder is deemed to have sold the home to themselves. This means GST/HST is payable and collectible on the fair market value (FMV) of the home. Also, if the intention is the flip the property, or if your primary residence is outside of Canada, the home will not qualify for the new housing rebate, which is available on a primary place of residence. These GST/HST delinquencies have caused huge headaches for real estate owners who have been audited, as reported below for Ontario:

CRA is also auditing unreported capital gains and unreported worldwide income. But, just as important as compliance, is how you justify the funds used to buy the real estate in the first place. If that was an unreported source of income, or if your lifestyle or a large down payment is not compatible with the income you report, or if you are a low-income taxpayer who is “hiding” a wealthy taxpayer, you’ll have some explaining to do to the CRA.

This is a very complicated aspect of personal tax law and it is broad-based. Best to review real estate transactions with a DFA-Tax Services Specialist before you buy or sell. And if you are concerned about non-reporting, making a Voluntary Disclosure can help you avoid penalties.

Evelyn Jacks is President of Knowledge Bureau and author of 52 books on the subject of personal taxation and family wealth management. For more information on certificate courses that include real estate taxation, visit www.knowledgebureau.com and review the DFA-Tax Services Specialist online program offerings.

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