CRA Condo Audit Begins

Tax Audit Season is upon us and with it a warning for those who sold condominiums in 2012: The Canada Revenue Agency (CRA) is conducting an audit of condominium sales to check for non-compliance with the Income Tax Act (the Act).

The story was widely reported last month in the Toronto Star and Financial Post and supports the recent trends announced in the federal budget to catch more “tax cheats”. Knowledge Bureau will be offering an Audit Defence workshop later this month in Winnipeg, Calgary, Vancouver, and Toronto to prepare professionals to defend their clients in situations like this.

At issue is how the income was reported on sale. Taxpayers must have the paperwork that proves the sale of the condo was on account of capital (50% income inclusion) rather than income (100% income inclusion). Alternatively, the entire transaction may have qualified for the principal residence exemption.

The CRA is particularly concerned with transactions where one person agrees to purchase a condo before it is built, but ultimately sells their right to buy that condo before the building is registered in the Land Titles Office (LTO), using what are called “assignment clauses” in their agreements.

Under this type of arrangement, the builder will usually collect a fee, but the name of the original purchaser is never registered on title at the LTO. Usually the developers do not have to furnish the CRA with the names of these assignors, but under the CRA “Condo Project” which this audit target has been dubbed, they could be forced to do so.

People who have assigned multiple properties over the year or even the last few years will have difficulty persuading the CRA that these transactions should be on account of capital rather than income, and they certainly won’t be able to claim the principal residence exemption contained in Section 40(2)(b) of the Act. However, in many cases, the capital gains and/or  principal residence is legitimate and should be allowed.

The best thing to do is be prepared. Taxpayers need to have documentation to show intent of purchase and how the property was used, amongst other factors.  Dig out the purchase and sales agreements, occupancy permits, utility bills, and any documents that show the condo as a residence. Also document life events like marriage, divorce or birth of a child which indicates a change in the use of the residence.  In some cases, like a career move, an election can be made to preserve the principal residence exemption even if the taxpayer took a job in another city.

If the CRA determines that there was a transaction on account of income rather than capital, and reassesses the tax return, the resulting financial outcomes can be very expensive, plus the interest clock runs on unpaid balances. The taxpayer will need to act quickly in gathering evidence and formulating a defence in time to respond to the audit proposal letter. 

The deadline to be respond to an audit letter is usually 30 days and the deadline for filing a Notice of Objection is 90 days from the date of a reassessment. Extensions may be granted upon request for responses to the audit letter in some cases. It’s always prudent, however, to file a Notice of Objection on time to preserve further appeal rights.

That’s where a relationship with a certified tax practitioner can really pay off. This audit project it could affect many taxpayers – many of whom are innocent – and have nothing to fear but the extra time it will take to comply with the documentation requests. However, professional advisors need to brush up on the rules and be ready to defend their clients in cases where the more advantageous tax treatment claimed on the return is in fact, their right.