CANADA REVENUE AGENCY AUDITS OF PRE-CONSTRUCTION CONDOS DENYING PRINCIPAL RESIDENCE EXEMPTION (PRE) TAX-FREE STATUS
Since January of 2013, The CRA audit divisions have been targeting sales in the GTA of what they deem to be a quick resale of a newly purchased pre-construction condo. If you resell within 6, 7 or even 8 months of getting title, you could face a reassessment for taxation on the full gain, 50% penalties on the amount reassessed, plus interest. This is the result of the CRA concluding that you bought the condo with a “profit motive” and not for personal usage. We call their technique a “pure tax grab” and it’s shameful! If this has happened to you, the Taxperts team will get the penalties reversed.
The primary rule for getting the tax-free PRE status is that you MUST take occupancy of the residence. The CRA Interpretation Bulletin on this issue says that PRE status will be conferred if there is personal occupancy for “…a short period of time”. The amount of time is not defined but this use of language in the CRA’s own Interpretation Bulletin will be interpreted by the courts liberally in favour of taxpayers.
Our firm took a client to Federal Tax Court and got the tax-free PRE status after only 5 months and 3 days of occupancy (Mostashari v. Her Majesty the Queen). We believe that the courts will eventually settle on 4 months of occupancy to the get tax-free status. The CRA will still review resales within 6, 7 or even 8 months of getting title since many taxpayers pay the reassessed amount, penalties and interest out of fear and do not retain a tax lawyer who would win the case.
A CAUTION: If you do not take occupancy and the CRA insists that you repay the New Home Buyers Rebate on HST paid on purchase - - usually an amount of $24,000 - - APPEAL their decision. The courts have ruled that eligibility for this rebate is based on your personal circumstances at the date of signing the Agreement of Purchase and Sale and that failure to move in does not disqualify you from getting the rebate. Customized upgrades at the time of signing the purchase offer is strong proof that the property is being bought for personal usage and not to make a profit.
- The CRA has a new state-of-the-art computer system with well-written software designed to review virtually EVERY sale of a residential property in the GTA area.
- Values of condominiums often rise 40% to 75% or more between the time an Offer of Purchase and Sale is signed in the sales showroom and title passes 4-5 years later.
- The CRA is being opportunistic and engaging in abusive audits of home sales. This is a pure ’tax grab’ on their part.
- The CRA is tracking sales data on the TREB Multiple Listing Service and using the Teranet Service to check titles - - the name(s) on a deed - - at Land Titles & Registry.
- The CRA requires all developers to provide a digital list of all those who have signed Offers and catches anyone selling an offer - - also known as ‘flipping an offer’ - - by comparing the list of signees of offers to the names on a deed. Anyone flipping an offer will pay FULL taxes on the entire gain and face 50% penalties plus interest if they do not declare the gain.
- The PRE exempts from taxes any gain on sale if the home is used as your personal home during the entire period of ownership. The PRE requires that you take occupancy of the home. If you do not move in you will not get the tax-free status.
- You will pay capital gains tax on the sale of a second home not designated as a Principal Residence and on the sale of rental properties owned and rented for AT LEAST 18 MONTHS. 50% of the gain on such “capital dispositions” is exempt from taxation.
- You will face FULL taxation as ‘regular income’ where you sell/assign an offer before getting title or relist for sale on MLS on the ‘quick sale’ basis as contrived by the CRA - - known as ‘flipping’ a property. If you sell a rental property before 18 months of ownership the CRA will not allow you to treat the sale as a “capital disposition and will tax the full gain as “regular income’.
- If you do not declare the gain on the sale of a second home, rental property or the profit on ‘flipping’ an offer, the CRA can reassess you for taxes, 50% penalties under s.163(2) of the Income Tax Act (ITA) - - this requires that the taxpayer ”knowingly file a false return”. Failure to declare a sale of a personal residence is an omission and NOT an act of filing a false return. If the tax evasion is sufficiently grave you can be summoned to appear in the Ontario Court of Justice and be prosecuted under s. 239 (1) of the ITA and face up to 200% penalties and 2 years in jail.
Contact us, The Taxperts Group. Our team has more than three decades of experience handling CRA audits and appeals, and we want to help you.
Telephone: (416) 493-0444
221-2200 Yonge Street
We’re located in the Canada Square building at the corner of Yonge and Eglington.