How the Canada Revenue Agency addresses non-compliance in the real estate sector
Key areas of compliance risk in the real estate sector
The Canada Revenue Agency (CRA) uses a combination of advanced risk-assessment tools, analytics, leads, and third-party data to detect and address non-compliance. The CRA audits the files of taxpayers that it identifies as being high risk.
The real estate sector is one of many sectors that the CRA addresses through its risk-based method, and audits related to real estate occur regularly across the country.
The CRA has identified the following key areas of concern:
Reported income does not support lifestyle
The CRA takes into consideration whether the income reported on tax returns is sufficient to support a taxpayer’s lifestyle, including the cost and maintenance of real estate.
The CRA can establish correlations between a taxpayer’s reported income and their lifestyle. The acquisition of expensive assets, such as a high-end home, without an obvious income source, can be an indicator of potential unreported income on income tax returns.
People who buy and resell homes within a short period for a profit are often engaged in property flipping. The CRA acquires and analyzes third-party data and has found that some flips are not being reported or are being reported incorrectly. The profits from flipping real estate are generally considered to be fully taxable. The facts of each case determine whether such profits should be reported as business income or as a capital gain.
There are three main categories of individuals engaged in this:
Professional contractors or renovators – They rapidly buy and sell real estate at a profit (sometimes demolishing or renovating the property).
Speculators or middle investors – They buy a property before its construction is completed and then assign the right-to-sell clause that is in the contract to another speculator or the final buyer. This is called "shadow flipping". It can occur many times between the first sale and the final sale of a property. The original seller often does not know that their property has been assigned to another buyer until the closing date.
Individual renovators – They buy real estate, renovate it, and live in it for a short time before selling it for a profit, in order to claim the principal residence exemption.
Unreported capital gains on the sale of property
If you make a profit on the sale of real estate, you may realize a capital gain. All capital gains, exempt or not, must be reported on Schedule 3, Capital Gains of the T1 Income Tax and Benefit Return. If you own more than one property at any given time, only one property is eligible for the principal residence capital gains exemption for any given tax year at the time of sale.
More information concerning the principal residence exemption, including designation of a property as a principal residence can be found in Income Tax Folio S1-F3-C2, Principal Residence.
Unreported capital gains tax on property sold by non-resident
A non-resident who invests in property in Canada is liable to pay capital gains tax on profits from the sale of that property and is generally not eligible for the principal residence exemption.
It is the responsibility of the buyer of the property to know whether the seller is a Canadian resident or a non-resident. Usually the notaries or real estate lawyers who complete the legal documents associated with real estate transactions have the responsibility to complete these verifications.
A purchaser who buys a property from a non-resident seller should request, from the seller, a certificate of compliance issued by the CRA, prior to releasing the funds for the purchase. If not, the purchaser could be held liable to pay the CRA any unpaid income tax on behalf of the seller. More information regarding the sale of taxable Canadian property by non-residents of Canada is available in the CRA’s Information Circular Procedures Concerning the Disposition of Taxable Canadian Property by Non-Residents of Canada – Section 116.
Unreported worldwide income
An individual’s residency status is critical in establishing their Canadian tax liability and the tax treatment of the individual’s worldwide income. Residency status should not be confused with citizenship. For example, a citizen of a country other than Canada who has significant residential ties in Canada may be deemed to be a resident of Canada.
Residents of Canada have to report their worldwide income to the CRA. Non-residents only have to report their Canadian-source income.
An individual’s residency status is determined on a case-by-case basis in light of many facts which include:
• Residential ties in Canada
• Purpose and duration of visits outside Canada
• Social and economic ties outside of Canada
For more information, go to Income Tax Folio S5-F1-C1, Determining an Individual's Residence Status.
Unreported GST/HST on the sale of a new or substantially-renovated home
Generally, the builder of a new or substantially-renovated home must collect GST/HST when the home is sold and remit that tax to the CRA.
If a builder leases or rents out a new or substantially-renovated home, the builder is deemed to have sold the home to themselves. The GST/HST is payable at once on the fair market value of the home, including the land value, and the builder must remit that tax to the CRA. Additional information, including exceptions to this rule, can be found in the CRA’s publication, GST/HST memorandum 19.2.3 Residential Real Property – Deemed Supplies.
In most cases, the sale of used housing is exempt from GST/HST.
Rebates – Tax rebates available to the builder or purchaser
If you buy or build a new home, or significantly renovate an existing home, you may be entitled to a GST/HST rebate if you either:
- Live in it as your principal residence (New Housing Rebate); or
- You lease or rent it (New Residential Rental Property Rebate).
However, if your intention is to flip the property you may not be eligible for any rebate and you must charge and remit GST/HST on the sale of the property.
One of the main conditions for the new housing rebate to be available is that you must buy or build the house for use as your or your relation's primary place of residence.
If you buy or build a new house in Canada, but your primary place of residence is outside Canada, then your house in Canada would be a secondary place of residence and would not qualify for the new housing rebate.
The CRA regularly monitors tax compliance in real estate transactions. Since 2015, there has been a significant focus on major centers such as the Greater Toronto Area and the Lower Mainland in British Columbia, where there are consistently high numbers of real estate transactions.
Through experience and the use of third-party data, the CRA gains a better understanding of non-compliant behaviour, leading to more audits and compliance actions.
The CRA continuously evaluates risk as it relates to non-compliance. Resources are dedicated accordingly, and they can shift in relation to risks that develop.
|Programs||Number of files completed||Audit assessments*|
|Income tax||3,631||$63.5 million|
|GST/HST New Housing and New Residential Rental Property Rebates||31,342||$426.4 million|
|Programs||Number of files completed||Audit assessments*|
|Income tax||1,864||$303.2 million|
|GST New Housing and New Residential Rental Property Rebates||4,485||$21.1 million|
*These amounts include penalties assessed.
The CRA will apply a penalty equal to 50% of the additional tax payable if a taxpayer knowingly makes a false statement when filing a return. During the period of April 2015 to June 2019, the CRA applied 2,022 penalties, totaling $113.1 million.
|$ in millions||169||161||263||434|
|$ in millions||10||7||27||57|
Correcting a previous return(s)
Taxpayers who have made a tax mistake or left out details about income on an income tax and benefit return can go to How to change your return to find out how to correct their tax affairs.
Under certain conditions, taxpayers may also qualify for the Voluntary Disclosures Program. If a taxpayer qualifies, the CRA can offer them a second chance to make things right.
When others have not reported
Taxpayers can help level the playing field for those who pay their taxes. Anyone who suspects that an individual or business has not reported all their income or GST/HST can contact the CRA through the Leads Program. Through this program, the CRA reviews information provided by the public to help identify taxpayers who are not complying with their tax obligations.
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