When Are You Considered to Be In the Business of Buying and Selling Real Estate?

Lots of people like to dabble in real estate when markets are hot. The issue for tax filing purposes is whether you held the property for personal use, as a passive investment or whether you are in fact in the business of buying and selling real estate.

When real estate is held for investment purposes, any income it earns will be “income from property,” generally in the form of rent. Upon disposition of the property, any increase in value will usually be taxed as a capital gain. However, if you are continuously flipping your properties, it’s possible you’re in business.

The Income Tax Act does not prescribe when gains from the sale of real estate will be considered income rather than capital. In making such determinations, the courts have considered factors such as:

• the taxpayer’s intention with respect to the real estate at the time of its purchase;
• feasibility of the taxpayer’s intention;
• geographical location and zoned use of the real estate acquired;
• extent to which the intention was carried out by the taxpayer;
• evidence that the taxpayer’s intention changed after purchase of the real estate;
• the nature of the business, profession, calling or trade of the taxpayer and associates;
• the extent to which borrowed money was used to finance the real estate acquisition and the terms of the financing, if any, arranged;
• the length of time throughout which the real estate was held by the taxpayer;
• the existence of persons other than the taxpayer who share interests in the real estate;
• the nature of the occupation of the other persons who share interest as well as their stated intentions and courses of conduct;
• factors which motivated the sale of the real estate; and
• evidence that the taxpayer and/or associates had dealt extensively in real estate.

The more closely a taxpayer’s business or occupation is related to real estate transactions, the more likely it is that any gain realized by the taxpayer from such a transaction will be considered to be business income (report on a business statement—100% income inclusion) rather than a capital gain (report on Schedule 3 as a capital gain—50% income inclusion).

In addition, it’s not necessary for you to buy and sell properties. If CRA considers the transaction to be an Adventure or Concern in the Nature of Trade, even a one-time transaction can be considered to be a business transaction. The result? Again, you must report business profits (100% taxable) as opposed to a capital gain (50% taxable).

Generally, when the intention of the taxpayer is to earn income from the sale of real estate, based on these factors, the income is included in income from business. When the asset is held for investment purposes (i.e. to earn income from property) and interest or rent is earned, the gain on sale is capital in nature.