Pre-construction Condo Flips Being Investigated as Part of a Crackdown on Tax Evasion
The Canada Revenue Agency (CRA) is currently analyzing thousands of preconstruction condo sales in Toronto and is requiring condo developers in Vancouver to provide information about buyers who sold units before buildings were completed.
This is part of an investigation on presale condo flips to determine whether audits need to be carried out to find tax evasion and tax avoidance cases.
House flipping (buying and then selling a property for profit) is a common form of real estate investment. In the case of preconstruction condo sales, someone who buys a unit in a condominium and sells it before the building is completed is required to pay taxes on the profit of the sale as business income. This taxes would be paid on 100 percent of the profit. This is different from a real estate sale that is considered a capital gain. In the case of a capital gain, a person would only pay tax on 50 percent of the profit.
If the CRA determines that a person purchased a property with the intent of selling it for a profit (as opposed to buying a unit to live in or rent out) it will tax the profit as business income.
The CRA uses the facts from each case to determine whether the profits are business income or a capital gain. By analyzing preconstruction condo sales and requesting additional information from developers, the CRA is trying to learn more about these transactions to determine if taxes were paid correctly. It is also looking for cases where the transactions were not disclosed at all.
What is “Paper Flipping?”
A person can buy a presale condo with a deposit of about 20 percent down. The balance of the purchase price is not due until the building is completed. However, the owner of the unit can sell the unit before the building is finished. This opens up opportunities for speculation on price growth. This is called “paper flipping” as the original seller never steps foot into the unit they’ve bought. The transaction takes place entirely on paper. Such transactions are also known as assignment sales.
In Ontario and British Columbia, there is no public registry that tracks such sales. Instead, contracts for preconstruction condo purchases and assignment sales are held by developers. Information on unit owners is not filed with land registries until after the building is completed. This means that sales could be occurring that the CRA is not aware of, or there could be situations where taxes are not properly paid.
If a person completes such a transaction and does not properly report the gains on their tax return, they could be audited by the CRA. Also, in addition to being ordered to pay the taxes owing, a potentially a significant penalty could also be charged. The person could even face criminal charges for tax evasion.
Starting with the 2016 tax year, individuals are required to report the details of all real estate sales on their tax returns, including a sale of their primary residence. If you did not properly list real estate property sales on your taxes, or did not correctly pay taxes on the profits of a sale, the CRA could be looking into your case. Contact the professionals at Tax Solutions Canada today. We can help resolve your tax problem and negotiate with the CRA to reduce interests and penalty charges.