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Canada Revenue Agency Investigating Several Toronto Condo Sales

A number of condo sales in Toronto are confronted with investigation by the CRA, aimed at people selling condos for a large profit now that the condo boom is over.

Some Toronto sellers of new condos are experiencing their profit of price gains in a booming condo market being swallowed up by CRA auditors who have instilled tax penalties for buyers who insisted that the condo they purchased was their home but then up and sold.

The Canada Revenue Agency has not divulged the number of sellers that have experienced these penalties. Author David Sherman, (a Toronto tax lawyer), amoung other tax experts, blame auditors of blatantly overlooking some justifiable reasons for a few of these sales.

Sherman is quoted as saying, " The auditors have applied a rare 50 per cent penalty for 'Gross negligence' even on those who had never owned a condo previously."

CRA Spokesperson, Sam Papadopoulos, who quoted the agency's criteria to audit was based on "Current and emerging risks to the tax base." The CRA remarks that they have discovered non-reporting of taxable income, builder GST/HST, housing rebates and capital gains/income in sales of property during the real estate boom.

Papadopoulos also stated that the auditors are also on the look out for the sellers objectives, type of property sold, regularity of sales and purchases, the reasons the seller sold and how the transaction fit in with the sellers normal business practices.

He also wanted to clarify that auditors don't receive any type of kickback or bonus to inspire them to do more audits.

There are three levels of tax analysis that Canada has for real estate sales:

 

  1. a main, or primary, residence
  2. tax on half of a gain from the sale of an investment property, or of other rental or recreational property and
  3. complete taxation of creating a business of buying and selling properties (also known as flipping.)

 

Taxation Lawyers in Kitchener representative (and lawyer) Jamese Rhodes states that some auditors are making allegations that sellers are producing quick flips, if the time within the registration and sale of a condo property is short term. These allegations are being made even though the condo could have been purchased years before, in the preconstruction phase.

Rhodes is quoted saying, " If someone signed a purchase agreement 10 years ago to buy a condo, but the sold it the day after the condo was finally registered the CRA would say that person sold the condo as a quick flip because they only owned it one day." he says.

" The CRA doesn't seem to care that a person's circumstances might have changed over the ten years, such that they don't want to live in a condo anymore."

One of Rhodes clients, after owning a condo for four years, became engaged. His fiancee did not want to live in the condo as she wanted to be closer to her work in Guelph. His client decided to sell the condo after it was registered. This resulted in an assessment by an auditor who was skeptical of selling so soon after registering the unit. The result was an assessment of over $100,000 in business income ending up in a tax bill of approximately $50,000 as well as a penalty of $25,000. The estimated cost to present this matter to the Tax Court of Canada is approximately $10-$15,000.

Another seller, a married chartered accountant, had purchased a new 935 square foot condo, to be built at Bloor and Jarvis. She had waited five years for the completion of the unit. In 2011, after living in the condo for 15 days decided that there was not enough living space. " We would have had to turn the entire second bedroom into a closet " she explained. " My husband would have to watch television in the living room. "

The couple changed their plans, keeping the previous family residence. They claimed the condo as a main residence during their ownership of the unit. (You can claim different homes as your main residence, but not at the same time.)

Now a CRA auditor has instructed that she pay $72,000 of tax and a $36,000 penalty, on a $150,000 price gain. After researching CRA practices, she wrote to Gail Shea, The Minister of National Revenue, requesting her to order an investigation into the matter.

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Nadine Robbins, Sotheby's International Realty Canada
1867 Yonge Street, Suite 100
Toronto, ON, M4S 1Y5
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