Real Estate - Capital Gain

Selling real estate? The CRA is watching

When you sell property, the transaction must be correctly defined and reported for tax purposes. Failure to do so may result in unwanted audits, potential back taxes, and related interest and penalties. Such negative outcomes occur regularly.

Last spring, the Canada Revenue Agency (CRA) announced updated results of its audits in the real estate sector, which resulted in over $1 billion in additional gross taxes since 2015. During the same period, CRA auditors reviewed over 41,700 files in Ontario and British Columbia (see tables below), resulting in over $100 million in assessed penalties.

Looking specifically at last year, the CRA assessed $171 million more in taxes related to real estate than in the prior year—a 65% increase—and penalties more than doubled to over $57 million.

Clearly, the CRA is concerned about non-compliance in the real estate sector and has taken steps to curb what it deems to be inappropriate behaviour.

Tax on the sale of real estate

From a tax perspective, much of the discussion about real estate transactions focuses on two things. When appreciated property is sold:

1. Is the transaction taxable?
2. If yes, is the net profit taxed as business income or a capital gain?

The answers depend on circumstances. How a sale should be reported for tax purposes depends on a number of factors (see “Factors the CRA considers in an audit” below).

Since 2016, all property sales must be reported to the CRA, including that of a principal residence. The tax characteristics of the sale normally depend on whether the property was bought primarily to:

-live in as a principal residence,
-build or renovate, and sell (often referred to as a “flip”) or
-create rental income.

In the first scenario, you buy a property to live in as their principal residence (or for a spouse, common-law partner or child to live in). When the property is sold, although the sale must be reported to the CRA on your tax return for the year of sale, any resulting capital gain is often fully sheltered from tax because the conditions for claiming the principal residence exemption are satisfied, and the property was designated as such for each year of ownership.

Next, consider the case where you buy a property (or buy vacant land and builds a property), takes possession and does some renovating. After the home is improved, you sell the property, and the gains (or losses) form part of your income. You may have lived in the property while making improvements; however, this doesn’t entitle you to the principal residence exemption if the intention was always to buy, improve and sell for profit. In this case, profits realized on the sale would normally be considered fully taxable business income.

Lastly, consider the case where you buy a property primarily to earn rental income, which you pay tax on as it’s earned. When the property is sold, the profit would normally be taxed as a capital gain, subject to a 50% capital gains inclusion rate. If a property is used primarily as a principal residence but a portion is used to earn rental income, the property can be fully sheltered from tax using the principal residence exemption, provided that:

-the income-producing use is ancillary to the main use as a principal residence,
-there is no structural change to the property, and
-no capital cost allowance is claimed on the property.

Factors the CRA considers in an audit

During an audit, the CRA considers a number of factors to determine whether a property sale was reported correctly. These include:

-the type of property sold,
-how long the property was owned by the seller,
-the seller’s history of selling similar properties,
-whether the seller did any work on the property,
-why the property was sold, and
-the seller’s original intention in buying the property.

Understanding these factors can help you appropriately define the nature of your property sales.

CRA’s ongoing strategy for tax non-compliance

Through experience and the use of third-party data, the CRA has aimed to gain a better understanding of non-compliant behaviour, leading to more audits and compliance actions. To support these efforts, the 2019 federal budget proposed providing the CRA with $50 million over five years and $10 million ongoing to create a Real Estate Task Force focused initially on the Toronto and Vancouver areas. The task force will focus on ensuring that:

-taxpayers report all sales of their principal residences on their tax returns;
-any capital gain derived from a real estate sale, where the principal residence tax exemption doesn’t apply, is identified as taxable;
-money made on real estate flipping is reported as income;
-commissions earned are reported as taxable income; and
-for Goods and Services Tax/Harmonized Sales Tax purposes, builders of new residential properties remit the appropriate amount of tax to the CRA.

According to the Department of Finance, expected revenue from this initiative is projected to be $68 million over five years, starting in 2019-20.

Correcting a previous return

Where you have made a mistake or left out details about income on a tax return, you can request an adjustment using CRA Form T1-ADJ. Alternatively, for more complex scenarios and where significant penalties may be assessed, the Voluntary Disclosures Program may be appropriate.

By: Wilmot George, July 18, 2019, Advisor’s Edge

Visit the CRA’s website for more on the agency’s plan to address non-compliance in the real estate sector.

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2019 Federal Budget

The 2019 budget is titled “Investing in the Middle Class. Here are the highlights from the 2019 Federal Budget.

We’ve put together the key measures for:

  • Individuals and Families
  • Business Owners and Executives
  • Retirement and Retirees
  • Farmers and Fishers

Read more

2018 Federal Budget Highlights for Families

Several key changes relating to personal financial arrangements are covered in the Canadian government’s 2018 federal budget, which could affect the finances of you and your family. Below are some of the most significant changes to be aware of:


Parental Leave

The government is creating a new five-week “use-it-or-lose-it” incentive for new fathers to take parental leave. This would increase the EI parental leave to 40 weeks (maximum) when the second parent agrees to take at least 5 weeks off. Effective June 2019, couples who opt for extended parental leave of 18 months, the second parent can take up to 8 additional weeks, at 33% of their income.


Gender Equality

The government aims to reduce the gender wage gap by 2.7% for public servants and 2.6% in the federal private sector. The aim is to ensure that men and women receive the same pay for equal work. They have also announced increased funding for female entrepreneurs.



Effective for 2021 tax filings, the government will require reporting for certain trusts to provide information to provide information on identities of all trustees, beneficiaries, settlors of the trust and each person that has the ability to exert control over the trust.


Registered Disability Savings Plan holders

The budget proposes to extend to 2023 the current temporary measure whereby a family member such as a spouse or parent can hold an RDSP plan on behalf of an adult with reduced capacity.


If you would like more information, please don’t hesitate to contact us.

2018 Federal Budget Highlights for Business

The government’s 2018 federal budget focuses on a number of tax tightening measures for business owners. It introduces a new regime for holding passive investments inside a Canadian Controlled Private Corporation (CCPC). (Previously proposed in July 2017.)

Here are the highlights:

Small Business Tax Rate Reduction Confirmed

Lower small business tax rate from 10% (from 10.5%), effective January 1, 2018 and to 9% effective January 1, 2019.

Limiting Access to the Small Business Tax Rate

A key objective of the budget is to decrease the small business limit for CCPCs with a set threshold of income generated from passive investments. This will apply to CCPCs with between $50,000 and $150,000 of investment income. It reduces the small business deduction by $5 for each $1 of investment income which falls over the threshold of $50,000. This new ­regulation will go hand in hand with the current business limit reduction for taxable capital.

Limiting access to refundable taxes

Another important feature of the budget is to reduce the tax advantages that CCPCs can gain to access refundable taxes on the distribution of dividends. Currently, a corporation can receive a refundable dividend tax on hand (known as a RDTOH) when they pay a particular dividend, whereas the new proposals aim to permit such a refund only where a private corporation pays non-eligible dividends, though exceptions apply regarding RDTOH deriving from eligible portfolio dividends.

The new RDTOH account referred to “eligible RDTOH” will be tracked under Part IV of the Income Tax Act while the current RDTOH account will be redefined as “non-eligible RDTOH” and will be tracked under Part I of the Income Tax Act. This means when a corporation pays non-eligible dividends, it’s required to obtain a refund from its non-eligible RDTOH account before it obtains a refund from its eligible RDTOH account.

Health and welfare trusts

The budget states that it will end the Health and Welfare Trust tax regime and transition it to Employee Life and Health Trusts. The current tax position of Health and Welfare Trusts are linked to the administrative rules as stated by the CRA, but the income Tax Act includes specific rules relating to the Employee Life and Heath Trusts which are similar. The budget will simplify this arrangement to have one set of rules across both arrangements.