CRA challenges real estate transactions ahead of anti-rollover rules

Jamie Golombek: CRA is challenging perceived real estate ‘flips’ through the justice system, with mixed results

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Canada’s new anti-rollover rules for residential real estate are expected to take effect January 1, 2023 and are designed to “reduce speculative market demand and help cool excessive price growth.”

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The new tax law will not allow the use of the principal residence exemption to protect the realized capital gain on the sale of your home if you have owned it for less than 12 months, allowing for some exceptions such as death, disability, separation and job relocation. Instead, the gain will be 100% taxable as business income.

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But the Canada Revenue Agency isn’t waiting for this new legislation to take effect. He is currently challenging perceived real estate “rollovers” through the court system, with mixed results, depending on the facts of the case.

The most recent example involved a Toronto homeowner who went to tax court to challenge the CRA’s denial of her primary residence claim.

The taxpayer was reassessed by the CRA for her tax years 2011, 2015 and 2016 in connection with the sale of four properties she owned at various times during that period. But it was the 2011 sale of his Toronto property that was more controversial, because the CRA assessed the taxpayer beyond the normal three-year reassessment period and imposed a gross negligence penalty for that year.

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In court, the taxpayer explained that she experienced “tumultuous relationships” with her ex-husband from 2010 to 2014. She said this led to an on-again/off-again cohabitation, culminating in a final separation and divorce in 2015. The The taxpayer testified that during 2010 and 2011 she often stayed in the house in question “as a refuge from the acrimonious and abusive relationship with her now ex-husband”. She argued that this home was her primary residence, so she should have been exempt from capital gains tax when she sold it in 2011.

The CRA disagreed, arguing that the property had been bought and sold as “an venture in the nature of trade” and therefore its sale should be classified as 100% taxable business income. He argued that the taxpayer never changed his primary address, employer’s T4 address, or other mailing address to this property, so his position was that he “flipped” the property after completely rebuilding it, within a period in a relatively short time, for a large profit.

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The Tax Court was eventually tasked with deciding four key issues with respect to the home’s 2011 disposition.

Should the sale properly be classified as an venture in the nature of trade and, therefore, taxable as business income or capital goods, thereby granting it capital gains treatment? If it was capital goods, was it the primary residence of the taxpayer, thus allowing the capital gain to be exempt from tax? There was sufficient misrepresentation in the tax payer’s 2011 tax return (i.e. failure to report the sale of the property) for even the CRA to re-open the 2011 tax year, which would otherwise be statute-barred and beyond the normal three-year period of revaluation? And finally, was the taxpayer grossly negligent in filing his 2011 tax return and therefore subject to a gross negligence penalty?

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After analyzing the facts and circumstances of the case, the judge concluded that the taxpayer “hardly fits the factual mold of the usual real estate ‘flippers’.” She was a teacher, not a real estate agent, and she had other circumstances that accounted for the “unmeasured property mandate,” namely her abusive, on-again, off-again marriage that she was trying to physically and physically leave. legally.

“This was not a breaking story,” the judge noted. “He appeared prominently in the file during the CRA’s audit and file notes and explained his literal ‘comings’ and ‘comings’.

Ultimately, the judge held that the nature of the property, the length of ownership, the limited frequency of the taxpayer’s real estate endeavors to date, the work performed, the motive, and most importantly, the circumstances that dictated the sale of the property led to the conclusion that the property was acquired as capital property, rather than turned over.

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Once the judge ruled that the home was capital property, the next question was whether it could be considered his primary residence at the time, and therefore tax-exempt upon sale. The judge noted that the property was never regularly occupied and there were “no identifiable changes of address, permanent hallmarks or other household expenses and touches, beyond the mandatory utilities.”

The judge, in sentence the capital gain was taxable because it was not his principal residence, he concluded that “although he may retrospectively believe that (the property) was his permanent domicile, his current belief cannot placate (the CRA’s) assumptions without some additional evidence.”

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The judge then turned to the question of whether there was a misrepresentation about his return in 2011 due to “negligence, negligence or willful misconduct” in not reporting the sale of the home. The judge held that the taxpayer did not have “details and material to reasonably demonstrate that he might have been right” in his filing position, so the CRA was entitled to reopen and reassess the 2011 tax year, even beyond the normal reporting period. revaluation.

Finally, the judge addressed the issue of gross negligence and concluded that the taxpayer should not be found to be grossly negligent in adopting his filing position that the house was his primary residence, then held that the gain should not be carried over in his 2011 comeback.

He quashed the gross negligence penalties, noting “(the taxpayer), though educated, is clearly unfamiliar with the ways of business and taxation. His belief that he could navigate tax laws because he was referring to personally owned real estate was unfounded. However, based on all the facts, it did not amount to a deliberate act, refined to the indifference of compliance with the law.

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the Managing Director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com

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