Condo flippers beware, the Canada Revenue Agency (CRA) is coming after you. If it decides you’re flipping condos, then expect to pay higher taxes.
This is how it works: You buy a condo, then immediately flip it and sell it to someone else. You never move in, you don’t even rent it out for a period of time and your name is never registered on title, but you had a capital gain – the difference from what you bought it for and what you sold it for – or what you think is a capital gain. You expect to be taxed at a lower rate on that gain. Not anymore. The taxman has you in his sights.
It’s not surprising, given the boom in the condo market and the recent budget announcement. Minister of Finance Jim Flaherty said the government was taking a closer look at loopholes and tax cheats. The condo flip might be considered a loophole.
Capital gain tax was introduced by the Canadian government in 1972. Its purpose was to finance social security payments and establish a more equitable taxation system. There is also a lifetime capital gain exemption in the amount of $750,000. The government is considering increasing this to $800,000. Go over the limit and capital gains are taxed at 50 per cent. For example, if your profit is $50,000 and your tax bracket is 46 per cent — that $23,000. You pay capital gains on half that or $11,500.
There is some good new –profit from a primary residence is tax exempt, however investment property is not. What’s been happening is some condo investors have been claiming the units as their principal residence. But even for those admitted investors, the tax department will be looking more closely at the transactions. If the CRA decides you are a flipper, then the money realized from a sale will be considered income and taxed at your tax rate. In the above example, instead of paying taxes on $11,500, the tax bill is on $23,000.
The CRA will be looking for proof that you are NOT a flipper so the onus is on you. If you’ve never moved in to the unit, it might be hard to convince the CRA that it’s a principal residence.
Billed as the “Condo Project”, the CRA will be a looking at a number of items; including how sales are recorded and what the intent was when the units were purchased. To make matters worse, if the CRA decides you lied, you could face a fine of up to 50 per cent of what is owed.
Sam Papadopoulous, senior public affairs advisor-manager with CRA’s Ontario region, has admitted the CRA does target some sectors and the active condo market has become a focus. Not only that, the CRA has more efficient ways ways of tracking down tax evaders, thanks to our high-tech world.
As April 30 looms, it might be best to consider more carefully how you file your income tax return. At minimum, have a discussion with your tax accountant and perhaps your tax lawyer as well.