ON THE HUNT

Get ready condo flippers, Canada Revenue Agency is hunting you
By Garry Marr
Financial Post April 20, 2013

You just sold your condo, you made a hefty profit and know you have to pay your taxes.

The bill might be more than you think.

If it’s your principal residence, there’s no tax, as long as you have the paperwork to prove it. The Canada Revenue Agency is taking a closer look at the condominium sector in what some in the industry have dubbed the “Condo Project.”

Even if you own up to it being an investment property, you may not be allowed the capital gains tax break and that means a bigger hunk of your profit going to Ottawa.

Let’s say your gain is $100,000 and your tax bracket is 46%. Capital gains are taxed at 50% so you would only owe $23,000 on that profit.

Not so fast! If the CRA says you are in the business of flipping condominiums, get ready to pay based on the gain being counted as income for a tax bill of twice the amount at $46,000. And, it gets worse. You could also face a fine of up to 50% of the tax owed for making a false disclosure.

With the deadline for filing taxes coming up April 30, you might want to think very carefully about how you record that housing sale you made in 2012.

Sam Papadopoulous, senior public affairs advisor-manager with CRA’s Ontario region, acknowledges that the strength of the condo sector has attracted the attention of the taxman.

“We do from time to time target some sectors more closely than others,” he said. “We look at the real estate market in general. Of course, [there is more focus], it’s a hot market.”

People in the industry have a different view.

Some suggest it fits in with the recent budget when Jim Flaherty, the finance minister, announced his government was taking a closer look at loopholes and tax cheats — hoping to shrink its deficit in the process.

One of the issues attracting the attention of the CRA is assignment clauses, where one person agrees to purchase a condo before it is built but ultimately sells his or her right to buy that condo before the building is even registered.

Builders usually collect a fee for that privilege but ultimately when title is registered at the land registry office the original purchaser’s name is nowhere to be found.

While most builders are unlikely to voluntarily supply a list of properties in their building that were assigned, they could be forced to cough it up if they are audited by the CRA.

Those people who have assigned their units to another buyer are going to be hard pressed to prove they planned to use the unit as an investment property rather just flipping — meaning the CRA is highly unlikely to allow them to count money made at the lower capital gains rate.

“If you keep [assigning property] then it is not capital gains, that’s trade and that’s income,” said Mr. Papadopoulous, adding you do it a “couple of times” and it’s income. “Of course, that’s part of [what they are investigating].”

The warning to people flipping property and thinking they can get away without reporting the gain is pretty clear.

“We live in the information technology age,” said Mr. Papadopoulous, who wouldn’t get into how CRA is tracking down the tax evaders. “We are putting our resources to work and following the trail where we can.”

Robert Kepes, a Toronto tax lawyer at Morris Kepes Winters, said he’s seen the CRA go after people who have been living in a property and still question it as a principal residence.


CRA starts with a letter to a taxpayer asking them for details about when and why they sold their property and people often fill out the questionnaire without legal advice.

The issue goes all the way back to 1971 when there was no tax at all on capital gains so everybody tried to avoid counting gains as income.

Mr. Kepes says the distinction between income and capital is as simple as the difference between a tree and the fruit that it bears.

“The tree is capital and it produces a fruit and the income is the profit that is derived when that fruit is sold,” he says.

If your condo is that tree and your rental income is the fruit and you make a profit from that rental income, that’s taxed as full income. You eventually sell the tree for more money and that’s just a capital gain, taxed at the 50% rate.

If your entire businesses is just trading trees and not producing fruit, that’s business income.

“The Income Tax Act asks what was your intention when you bought that condo,” said Mr. Kepes. “These principles are easy to describe but harder to prove in fact.”

The law is like a civil case, a judge doesn’t have to believe you beyond a reasonable doubt, but a judge does have to conclude you are more believable than the CRA.

“We have to bring all kinds of intrinsic evidence,” says Mr. Kepes, noting some clients will produce something as simple as a change in address on their driver’s licence to show they were using their condo as a principal residence.

If you never actually moved into the condo, it’s going to be tough to prove that it was principal residence.

You may never have produced income from the profit but that’s not to say you didn’t plan to, so perhaps you could get the capital gains exemption.

“The question can be ‘how did they come to sell the property,’” said Mr. Kepes, adding the CRA might look at whether you were advertising the property for sale.

Brian Johnston, chief operating officer of Mattamy Corp., says the CRA has ways to get information on sales.

“They audit real estate companies, look at the name on the contract and look at the final deed and see a difference,” said Mr. Johnston. “They see Bill Smith bought it and Joe Blow is on the deed. They want to know how this happened and follow the paper trail.”

He has some sympathy for consumers confused about the whole process.

“I think the government should make it a little simpler in terms of filing for principle residence exemption,” said Mr. Johnston. “It’s a real gray area of the law. The government has not done a good job for Canadians trying to specifically identify all the rules around [selling homes and paying taxes]. People might have inadvertently made mistakes.”

Condominium developer Brad Lamb, who has been audited several times, said ultimately it’s better to be more conservative when you’re filing — meaning just count the gain as income if you are in doubt.

“If you are prolific buyer or seller of properties, whether it’s condos or not, you have to govern yourself accordingly. If you don’t, you’ll get caught and be fined,” said Mr. Lamb. “I decided many years ago when I started buying condominiums, after talking with my accountant, you can pay [lower tax] or you can fight 50 years with Revenue Canada.”

http://business.financialpost.com/2013/04/20/get-ready-to-pay-income-tax-on-your-condo-profit/

THE HOUSING SQUEEZE

Jay Bryan: Did Ottawa squeeze housing at the wrong time?
By Jay Bryan
The Gazette July 16, 2012

Did the Harper government blunder into overstimulating a housing market that it’s now in the process of squeezing at just the wrong time?

The question springs to mind now that new numbers show Canada’s housing market showed signs of significant softness in June, with sales falling 4.4 per cent below their year-earlier level – the first such drop in a year – as the national average home price edged down by nearly one per cent.

This comes just as new, tighter mortgage-lending rules went into effect early in July, the key change being one that shortens the allowed repayment period on a government-backed insured mortgage to 25 years from 30.

The result is to jack up the monthly payment on a mortgage by about 10 per cent if the buyer was originally hoping to use the longer 30-year repayment option.

This is just the right medicine for an overheating real-estate market, but much more dubious when demand is already weakening. It will price some buyers, especially first-time ones, right out of the market.

Analysts, including some who favoured the tightening, are a little worried.

There was already a recent undercurrent of concern as home prices moved inexorably higher in the winter and spring: was the market setting itself for a painful fall? At TD Bank, chief economist Craig Alexander predicts an average price drop of 10 per cent to 15 per cent over the next two to three years.

Most analysts didn’t see such a big correction, although many think the priciest markets, Vancouver especially, are overdue for a dip.

But, warns economist Robert Hogue at Royal Bank, “the risks are higher now than they were before.” Hogue thought markets were cooling nicely even before the stricter rules came in. Now, he worries, “this may give a push beyond what the market needs.”

Douglas Porter, deputy chief economist at BMO Capital Markets, thinks the market will probably adjust without too much trouble, but acknowledges that he too feels a little tug of concern. “This may have been one turn of the screw too many,” he says. “That’s the risk.”

The irony is that it was under this same Harper government that Canada loosened its mortgage rules so much that by late-2006 you could borrow for 40 years with nothing down. The then-governor of the Bank of Canada, David Dodge, saw this as so irresponsible that he broke the central bank’s usual rule against criticizing government policy.

It’s what foolish governments often do: curry favour by loosening policy too much in good times, only to have to tighten as conditions worsen.

So far, though, the market still appears to be healthy, with modest price gains in most big cities across Canada, but a downtrend in sales pointing to the possibility of further cooling in the very costly Vancouver and Toronto markets.

Indeed, in the country’s priciest market, Vancouver, prices actually fell by nearly one per cent last month, according to the Home Price Index compiled by the Canadian Real Estate Association. Over the entire past year, Vancouver prices are only up by a modest 1.7 per cent.

This evaporation of price gains in a market that was red hot last year was so dramatic that it helped stabilize the entire Canadian market. The average Canadian price fell by 0.8 per cent from a year ago, but once you remove Vancouver from the numbers, the average price elsewhere goes up by 3.2 per cent, not down.

This resulted from the unwinding of frenzied demand early last year for some of the highest-priced homes on the Vancouver market, said Hogue, the Royal Bank economist. Possibly because foreign demand waned, such homes are now much slower to sell.

Toronto prices barely moved last month, edging up by 0.2 per cent, although earlier gains pushed the average up by a strong 7.9 per cent year-over-year.

Montreal, where last month’s gain was a modest 0.3 per cent, is ahead by a total of 2.7 per cent over the past year, according to the Home Price Index, which, unlike simple price averages, seeks to eliminate the distortions caused by varying numbers of high-priced and lower-priced homes sold in different months.

Calgary stands out as the only city where the number of sales went up significantly – by a robust 17 per cent, in fact – but prices rose by a more modest 5.3 per cent.

RISE & REPEAT

Prices rise for repeat home sales in city
By Mario Toneguzzi
Calgary Herald September 29, 2011

A survey of repeat home sales shows Calgary prices increased in July by 2.3 per cent from the previous month.

But the Teranet-National Bank House Price Index, released Wednesday, also indicated Calgary prices are down 0.9 per cent from a year ago - the only centre in the survey to experience a year-over-year price decline.

The index is estimated by tracking observed or registered home prices over time using data collected from public land registries. All dwellings that have been sold at least twice are considered in the calculation of the index.

The survey also said Calgary's index is still down 8.8 per cent from its alltime high of August 2007 and down 0.9 per cent from its pre-correction peak of August 2010.

For the six centres surveyed, the index was up 1.3 per cent on a monthly basis and 5.3 per cent on an annual basis.

Monthly increases were experienced in Montreal, 0.5 per cent, Ottawa, 1.0 per cent, Toronto, 1.7 per cent, and Vancouver, 0.9 per cent.

Annual increases were experienced in Halifax, 3.3 per cent, Montreal, 6.0 per cent, Ottawa, 4.1 per cent, Toronto, 4.8 per cent, and Vancouver, 8.5 per cent.

Meanwhile, the latest Global Real Estate Trends report released by Scotia Economics said the renewed slowdown in global economic activity is putting further downward pressure on already-weak residential property markets across much of the developed world.

And while Canada's hot housing market also has begun to cool, it remains a "notable outperformer," said Adrienne Warren, senior economist and real estate specialist with Scotia Economics.

Of the nine major developed markets tracked by Scotia Economics, with available second quarter data, only Canada, France and Switzerland registered positive year-over-year real price growth.

The report said Canada's housing market stands out in its resilience and longevity. Average inflation-adjusted existing home prices were up five per cent year-over-year in the April-June period, on par with the first-quarter's pace of appreciation. Data for July and August point to continued firm but stable sales through the late summer, alongside a levelling out in prices.

"Ultralow interest rates will continue to support affordability in the face of record high prices," said Warren. "Nonetheless, heightened economic uncertainty combined with recent signs of a loss of momentum in Canada's jobs market could keep some potential buyers on the sidelines for the time being. On balance, we anticipate a modest slowdown in the volume of sales transactions heading into year-end, alongside relatively flat prices."

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