The Canada Revenue Agency (“CRA”) has been going after those who buy and sell homes in quick succession for years. More recently, they have turned their attention to those who have bought and sold just one home in a short period.
Property Flipping Audits – How does CRA know?
They have staff who sit in land titles office reviewing for names coming on, and off title. They then match up these names with tax returns to see if taxpayers are reporting the sale of their properties. Since they started these audits, they have assessed billions of dollars to taxpayers while auditing tens of thousands of people.
Property Flipping Audits – What if the Sale is Justified?
There are plenty of circumstances that require the sale of a home that was recently purchased. Whether it’s a change in finances, health, employment, or marital status, sometimes taxpayers have no choice but to sell a home they just bought. If they lived in the home, they normally claim the Principal Residence Exemption to justifiably pay no taxes on the sale of the property.
However, the CRA has now made it their mission to go after everyone who sells their home regardless how reasonable the explanation might be. CRA auditors routinely refuse to listen to taxpayers when they try to explain the reasons behind the sale. They accuse taxpayers of running a for profit business, without even considering the taxpayer’s position.
Taxpayers who are then assessed may have the amount counted as a capital gain, or business income. Gross Negligence Penalties may even be assessed which balloons the amount owing by 50%.
Property Flipping Audit Normal Process
The typical property flipping audit, or real estate audit goes as follows:
Taxpayers receive an audit letter with a questionnaire. The questionnaire asks specific questions about each property sale. It also asks for specific documentation.
Taxpayers complete the questionnaire and provide the documentation requested.
Auditors either request more information, or they issue a proposal letter.
The proposal letter normally accuses the taxpayer of running a property flipping business, and proposes to add business income.
Taxpayers have a limited time to respond to the proposal letter.
A final decision is reached.
If taxpayers receive a notice of assessment or reassessment adding business income or capital gains, they can file a notice of objection to dispute the characterization of their sale.
Conclusion
These types of audits routinely result in assessments in the hundreds of thousands of dollars. Before you respond to the questionnaire, you should consult an expert so that the information and documentation being provided to the CRA does not hurt your argument that you are entitled to the Principal Residence Exemption.
Here at SpenceDrake Tax Law, we have helped hundreds of taxpayers fight property flipping audits, and we can help you to. Take advantage of our free consultation to learn how we can assist, and how we can protect your right to the Principal Residence Exemption.
Jeff Kirshen, BA, JD(US), JD(CDN)
Partner & Tax Lawyer
Disclaimer
Each article/blog post is only meant to provide general information. It is posted on a specific date. Laws and rules change. Please know that it may be out of date. It is not meant to provide legal advice, and it does not provide legal advice. It cannot be relied on. Every tax situation is unique, and that may mean situations differ from this article/bog. If you have legal questions, please consult a lawyer.