New anti-reversal rules for Canadian homes real estate It is scheduled to come into force on January 1, 2023 and is designed to “help reduce speculative market demand and limit excessive price appreciation.”
The new tax law prohibits the use of the principal residence deduction to protect capital gains realized on the sale of a home if the home has been owned for less than 12 months, and the tax exemption for death, disability, separation, employment, etc. We allow certain exceptions. transfer. Instead, profits are taxed at 100% as business income.
However Canada Revenue Agency We are not waiting for this new law to come into force. It is currently challenging the “inversion” of real estate as it is perceived through the court system, with varying results depending on the facts of the case.
The taxpayer was reassessed by the CRA for the tax years 2011, 2015 and 2016 in connection with the sale of four real estate properties it owned at various times during those years. But it was her Toronto estate’s most controversial decision, as the CRA assessed taxpayers beyond her usual three-year reassessment period and imposed gross negligence penalties that year. It was her 2011 sale.
In court, the taxpayer explained that she had a “tumultuous relationship” with her now ex-husband from 2010 to 2014. She said this led her to live together on and off, leading to her final separation and divorce in 2015. In 2010-2011, the taxpayer testified that she frequently stayed in the home in question “as a refuge from a bitter and abusive relationship with her now ex-husband.” He argued that because it was a residence, it should have been exempt from capital gains tax when he sold it in 2011.
The CRA disagreed, arguing that the property was acquired and disposed of as an “adventure in the nature of the trade” and that the sale should be classified as 100% taxable business income. It argued that the taxpayer had never changed her primary address, employer’s T4 address, or any other mailing address to the property, so the position was arguably the most profitable in comparison. After completely rebuilding it in a relatively short period of time, the property was “turned over”.
The Tax Court was ultimately tasked with resolving four fundamental issues regarding the 2011 housing dispositions.
Due to the nature of the trade, should the sale be properly classified as an adventure and therefore taxed as business income or capital property and thereby given capital gains treatment? Is it the taxpayer’s primary residence and therefore can the profits be tax exempt? It even allowed the CRA to reopen the 2011 tax year. Re-evaluation period? And finally, could the taxpayer be subject to a gross negligence penalty because it was grossly negligent in filing her 2011 tax return?
After analyzing the facts and circumstances of the case, the judge concluded that taxpayers “hardly fit the de facto mold of real estate’s usual ‘flippers’.” She was a teacher, not a real estate agent, and had other circumstances in which she described “her ownership tenure was immense.” legal.
“This was not the latest story,” the judge noted. “It appeared prominently in the file during the CRA’s audit and in her notes, describing her literal ‘coming’ and ‘going’. ”
Ultimately, the judge should consider the nature of the property, how long it has been held, how often the taxpayer has invested in limited property to date, the work involved, the motives, and, most importantly, the circumstances that govern the sale of the property. All in all, the property was acquired as a capital asset rather than flipping it over.
Once the judge found the house to be capital property, the next question was whether the house would be considered her primary residence at the time and exempt from taxes when sold. The judge said the property was never regularly occupied and that “other than mandatory utility bills, there were no identifiable changes of address, permanent hallmarks, or other domestic costs or contacts.” said.
judge, adjudicating Since it was not her primary residence, the profits were taxable. “While she may retroactively believe (the property) was her domicile, her current beliefs cannot soften the (CRA’s) assumptions without additional evidence,” it concludes. attached.
The judge then turned to questions about whether there had been false reporting on the 2011 return due to “negligence, carelessness, or willful neglect” in not reporting the sale of the home. The judge found that the position filed by the taxpayer lacked “details and materials that reasonably indicate that she could have been right,” so the CRA could not proceed beyond the normal reassessment period. , had the right to reopen and reassess the 2011 tax year.
Finally, the judge turned to the issue of gross negligence and the taxpayer should not be considered grossly negligent in adopting the declaration’s position that the home is her principal residence. concluded that
He reversed the gross negligence penalty, saying that “(the taxpayer), even though educated, is clearly unfamiliar with the way business and taxes work. Her belief that she could navigate tax law was unfounded, but on all facts it was a willful act and was not sophisticated in its complacency to comply with the law.”
Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director of Tax and Estate Planning at CIBC Private Wealth in Toronto. [email protected]
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