Flipping houses or condos? CRA reminds you that all profits are fully taxable

By ThinkPol Staff

Canada’s taxman is reminding house and condo flippers that all profits made buying and reselling homes in a short period of time are fully taxable.

This also includes pre-sale flips, where a property is bought and sold before its construction is complete, a process also called an “assignment sale”, according to the Canada Revenue Agency media release issued last week^[1]https://www.canada.ca/en/revenue-agency/news/newsroom/tax-tips/tax-tips-2018/flipping-houses-condos-know-your-tax-obligations.html.

Earnings from “shadow flipping,” where a speculator buys a property and then, for a profit, assign the right-to-sell clause that is in the contract to another speculator or the final buyer”, are also fully taxable, according the tax agency.

The CRA is emphasizing that “the principal residence exemption does not apply to property flipping” and “these transactions may also be subject to GST/HST which you would be responsible for remitting to the CRA.”

“The CRA acquires and analyzes third-party data and has found that some flips are not being reported or are being reported incorrectly,” the taxman says. “The profits from flipping real estate are generally considered to be fully taxable as business income.”

And you don’t get a free pass for being a non-resident. Irrespective of your citizenship and residency status, you must report and pay taxes for profits made from flipping property, the CRA says.

“A non-resident who invests in property in Canada is liable to pay tax on gains that arise from the sale of that property and is generally not eligible for the principal residence exemption,” according to the tax agency^[2]https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/compliance/does-canada-revenue-agency-address-non-compliance-real-estate-sector.html. “There are rules^[3]https://www.canada.ca/en/revenue-agency/news/newsroom/fact-sheets/fact-sheets-2016/what-your-federal-tax-obligations-when-buying-selling-property-canada.html related to the disposition or acquisition of certain Canadian property that require non-residents who sell Canadian property to notify the CRA and to pay an amount to cover their estimated Canadian tax liability. This protects the Canadian government’s ability to collect tax that would otherwise be payable on the sale of a property.”

From April 2015 to December 2017, the CRA audited 4,951 files in British Columbia and assessed $140.0 million as a result of these audits.

The penalties for non-compliance are harsh.

“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,” the CRA says. “During the period of April 2015 to December 2017, the CRA applied 1,254 penalties, totaling $38.6 million. The highest penalty was almost $2.5 million.”