Property Flipping and the Canada Revenue Agency
As described by the Government of Canada in this article, property flipping is when individuals buy and resell a home in a short period of time with the intent of making a profit. Usually, there are tax obligations payable to the Canada Revenue Agency (CRA) which are imposed on gains made from any real estate transaction. However, some properties are exempt from these tax obligations under the principal residence exemption, where a homeowner is exempt from paying tax on their home sold, as long as the property was their principal residence for every year owned. More insight about the principal residence exemption is offered in this article.
In today’s blog post, we discuss the noteworthy case of Hansen v. The Queen, 2020 TCC 102 (CanLII) where a homeowner sold five houses over the space of six years- between 2007 and 2012.
When the appellant, Hansen, filed his tax returns, he took advice from his accountant that the profits made from these sales were exempt from tax under the principal residence exemption. The Minister of Revenue, however, was of the position that Hansen was liable to pay tax on the sale of these properties as it was business income and therefore, reassessed him for profits, in addition to penalties.
One of the major issues in contention between the parties was whether the Minister could reassess the 2007, 2008 and 2009 taxation years after the normal reassessment period had elapsed. Usually, CRA has three years from issuing a Notice of Assessment to reassess the tax returns as explained in a similar article here. This period can however be extended if the Government can show a careless mistake or misrepresentation, provided for under subparagraph 152(4)(a)(i) of the Income Tax Act, RSO 1990, c I.2. The Court held that the respondent could not prove any mistake or misrepresentation on the part of Hansen as he and his family had lived in the three houses sold in 2007, 2008 and 2009. Therefore, the respondent could not reassess him for the 2007,2008 and 2009 taxation years.
The Court also held that the principal residence exemption could not be applied in respect to the Cedardown and Kilbirnie houses (as described in the decision) whose sale occurred in 2011 and 2012, because the appellant’s intention was to sell the houses at a profit and he dealt with the houses in a “business-like way” (paragraph 103). Hansen would, however, be taxed just 50% of the proceeds since he was a co-owner of these houses.
The Court waived off the penalties imposed on Hansen and allowed additional expenses of $8,531 and $54,387.53 for the Cedardown and Kilbirnie houses, as agreed by the parties.
In conclusion, it is important for homeowners to be aware of tax obligations that may be due to the CRA if the intention is to purchase a home and sell it quickly for profit, as this tax liability can be quite extensive.
At Northview Law, we would love to discuss any questions you have about some tax implications if you are considering purchasing a property and flipping it quickly You can book a free consultation with Northview Law on this link or contact us at 416-639-7639. We look forward to hearing from you soon.