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Capital Gains Tax smOver the last few years, flipping condos and houses has become a profitable endeavor for many Canadians, a way to turn hard work into hard-earned cash. However, what some are coming to realize is that the assumption taken as fact by many, that this is an issue of capital gains rather than a business, is not always the case.

With the surge in profits made by those selling houses, the Canada Revenue Agency has become more aggressive in their auditing, looking more closely at sales, and issuing assessments based on income tax standards rather than capital gains.

A recent Financial Post article looked more in depth at this, noting “when it comes to house flipping, Canadians need to be warned that profits from real estate may not necessarily be taxed as a capital gain, in which case only 50 per cent is taxable, but rather they could be taxed as business income, in which case 100 per cent of the profit is subject to tax.”

How is the difference determined? While no criteria are listed to distinguish between profits taxed as business instead of capital gain, case law has established several factors which seem to dictate how the difference is determined, most notably the nature of the property, length of ownership, frequency of and number of real estate transactions carried out and improvements made. The court also looks at the circumstances surrounding the sale as well as intention at time of original acquisition.

Author Jamie Golembek looked at a recent court case which dealt specifically with the issue, where a woman was charged income tax rather than capital gains after several property related transactions. In reviewing the court’s decision, Golembek noted, “The judge, upon reviewing these criteria, concluded that the taxpayer acquired the properties for the purpose of reselling them at a profit ‘at the earliest opportunity,’ rather than holding them as long-term investments with the intention ‘to build a diversified retirement portfolio,’ and that the taxpayer’s main intention was to make short-term investment returns. As a result, the taxpayer had to pay tax on the profits as business income, not as half-taxable capital gains.”

Read the article in full here:

If you are concerned that previous real estate transactions may come under scrutiny by the CRA, or if you are dealing with an assessment you believe is unjust, contact Tax Solutions Canada today. We can walk you through the available options: 1-888-868-1400.