Watch Out! CRA to Audit Condo Sales

In support of recent trends annouced in the Federal Budget to catch “tax cheats”, the Canada Revenue Agency is conducting audits of condo sales to check for non compliance with the Income Tax Act. The key issue is whether the profit from your condo sale is treated as “capital gains” (where only 50% is taxable) or as “income” (where 100% of the gain is taxable). The CRA is particularly concerned with “assignment” transactions where the person buys a pre-construction condo but subsequently sales the right to buy the condo before it is registered in the land registrar’s office. Usually the builder is not required to released the name of the original purchaser but under new CRA rules they could be forced to disclose it.

People who have assigned multiple properties over the year or even the last few years will have difficulty persuading the CRA that these transactions should be treated as capital gains rather than income. CRA is also going after people who take prosession of the condo unit but sale it shortly after the date of closing. Planning and preparation plays a key role in protecting yourself. Taxpayers need to have documentation to show intent of purchase and how the property was used, amongst other factors. Also document life events like marriage, divorce or birth of a child which indicates a change in the use of the residence. In some cases, like a career move, an election can be made to preserve the principal residence exemption even if the taxpayer took a job in another city.

If the CRA determines that the transaction is to be reported as income rather than capital gains, and reassesses the tax return, the resulting financial outcomes can be very expensive. For example, if your gain is $100,000 and CRA deems that this is to be classified as “income” then you must include the entire $100,000 as taxable income in the year of the sale. If it is capital gains then only $50,000 is taxable and you can also use capital losses from prior years if available to reduce the gain. CRA will also charge you interest on the taxes that you owe after a reassessment. The taxpayer will need to act quickly in gathering evidence and formulating a defence in time to respond to the audit proposal letter.

The deadline to be respond to an audit letter is usually 30 days and the deadline for filing a Notice of Objection is 90 days from the date of a reassessment.

My advice is to always seek independent financial advice from a qualified professional prior to engaging in any financial transactions.