Real estate investing has always been popular, but over the last few years this has grown in popularity and many Canadians, having invested by purchasing during the recession and selling now that the boom has returned, are feeling the heat from Canada Revenue Agency business auditors. Why? Well, when you purchase a home as an investment, you are expected to pay tax on any capital gains made, as stated in the Income Tax Act.
In the eyes of CRA, an investment property is one that is not being used as a primary residence. What’s the difference between a principal and non-principal residence? In general terms, a principal residence is one that you own (either alone or with another person) and that you, your current or former spouse or common-law partner, or any of your children lived in it at some time during the year.
According to CRA’s website, if the property you sold was your principal residence (for the entire time you owned it), you are not required to report the sale when you file your annual tax returns, and you don’t have to pay tax on any capital gains made through the sale of the property. However, if, at any time during the period of ownership, the property was not your principal residence, you have to report any gains that relate to that period of time.
A recent Toronto Star article had this to say: “Tax auditors have been targeting the once red-hot Toronto and Vancouver real estate markets, looking primarily for people who bought condos before they were built, intending to flip them for a profit as soon as the project is complete.” Many of these individuals are becoming targets of CRA audits because they did not report the gains made through these sales, resulting in heavy fines.
But it isn’t just those who purchased condos with the intention of selling them. Others, including some individuals who, for whatever reason, were forced to sell when the condo was completed, are also being targeted.
If you find yourself faced with a massive tax bill as a result of a CRA audit of a recent property sale, but know that the property was a principal residence and that you should not be required to face a penalty, your best option is to file a Notice of Objection. When you object to a CRA assessment, not only do you have the chance to appeal to CRA, any collection actions cease and interest accrual is halted. If your objection is accepted, this could mean major financial savings.
One thing to keep in mind, there is a time limit for objecting, and in order to increase the chances of the objection being accepted you need to include as much information as possible. Getting professional help with this is always a smart idea.
To find out more about objecting to a CRA assessment please contact Tax Solutions Canada by calling 1-888-868-1400.