Over the past decade, the condominium real estate market in Canada has been an excellent investment in major city centres like Toronto. The business of flipping condos in Toronto is lucrative with some people purchasing condos pre-construction and then selling as soon as the condo is built (or even before), making a tidy profit.
Condo owners have become a major target for CRA. In fact, The Toronto Star reported that in Toronto CRA auditors are aggressively looking at people who purchased condos pre-construction with the intention to flip them once construction is completed.
You may be thinking ‘how can CRA find out if I bought a condo pre-construction and then sold it?’ CRA has many resources including powerful software that enables them to see who owns a property, when it was purchased, how much it was purchased for, when it was sold and how much it was sold for. CRA also simply audits the condo developer which starts the trail. If CRA suspect you may be in the business of flipping condos (and they have successfully held this against people who did this only once) they will use their powers under the Income Tax Act to demand you disclose details that will prove their case.
According to the article published in The Star, CRA’s prime focus is those who purchased a new condo or home and sold it within 12 months of possession. The article suggested and that individuals who buy new homes are advised to reside in them for at least 18 months or they risk being taxed on the gain as income. You would not have the ability to claim the personal residence exemption on the gain and it will not be taxed at the lower capital gains tax rate – but at the highest marginal income tax rate plus applicable penalties plus interest.
Apparently over 1200 questionnaires have already been sent out and in about 250 cases CRA auditors demanded that GST/HST rebates be repaid immediately.
When many people think of an audit, they think of the formal version of an audit where a CRA auditor comes to their home or business to review their paperwork. Most ordinary people don’t realize that this questionnaire is a type of an informal audit and should you receive one, you are strongly advised to obtain professional guidance on the matter immediately – before you provide any information to CRA.
The challenge is that if re-assessed as a result of one of these questionnaires, you not only face new taxes but you will also face penalties and interest, retroactively, on the debt. Gross negligence penalties can be up to 50% of the tax debt assessed. Additionally, if you have already been re-assessed, perhaps you agree with the tax you owe but feel as though you have been unjustly penalized financially, it is important to work with a tax professional as soon as possible to file a Notice of Objection to the penalties.
You only have 90 days after the assessment is made to file an Objection. If, for some reason, the 90 days has passed already but you are within 12 months, your professional can apply for an extension to file an Objection and state the qualifying reasons why you didn’t file within the 90 days.
Unfortunately there are many people who buy condos pre-construction and then their financial situation changes, causing them to also come under scrutiny. We tend to agree with The Toronto Star article in that this seems to be a full-on assault on average Canadians, many who are just trying to work towards a better future.
If you have questions about what do if you have received a questionnaire from CRA about a property or if you have been audited or re-assessed, please visit www.taxsolutionscanada.com or call 1-888-868-1400.