Following the release of the 2019 budget, Canadian Tax Lawyers have been scrambling to parse proposed changes to Canada’s tax laws. While some of these changes are technical adjustments to highly complex rules, it is very easy to make sense of the CRA’s beefed-up real estate audit division for Ontario and British Columbia.
“Budget 2019 proposes to provide the CRA with $50 million over five years, starting in 2019–20, to create four new dedicated residential and commercial real estate audit teams in high-risk regions, notably in British Columbia and Ontario. These teams will work to ensure that tax provisions regarding real estate are being followed, with a focus on ensuring that:
- Taxpayers report all sales of their principal residence on their tax returns;
- Any capital gain derived from a real estate sale, where the principal residence tax exemption does not apply, is identified as taxable;
- Money made on real estate flipping is reported as income;
- Commissions earned are reported as taxable income; and
- For Goods and Services Tax/Harmonized Sales Tax (GST/HST) purposes, builders of new residential properties remit the appropriate amount of tax to the CRA.”
That said, while these measures are announced in the most recent budget, the efforts go back several years—over this time, CRA has consistently ramped up audits in the residential real estate sector. This is far from the first time that the federal government has looked to real estate hotspots in BC and Ontario as a source of revenue, but despite the hundreds-of-millions of dollars already located, they clearly don’t see the well drying any time soon.
Canadian Tax Laws do not use the term flipping, but, basically, this is what the enforcement is after. Whether or not we are talking about HST or income tax, most housing tax disputes turn on whether someone purchased a home planning on selling it, either not moving in, or moving in as a pretext to receive the generous tax treatment afforded to peoples’ residences.
Ontarian tax payers are likely to see a focus on HST, specifically, HST on the sale of new homes and erroneous applications for the New Housing Rebate. In contrast to British Columbia, the majority of outstanding debt in Ontario is HST, likely due to a much more generous housing rebate and an elevated HST rate of 13%.
Ontarians, particularly Ontarians without permanent residency or Canadian citizenship, should be particularly wary, as they could also be subject to the elevated Non-Resident Sales Tax (NRST).
CRA keeps its cards close to its chest when it comes to what the agency considers an audit flag and does not share this with Canadian Tax Lawyers. However, we know that CRA finds taxpayers to audit using computerized risk-assessment tools and analytics, combing through land registries for people who buy a property and then sell it after only a few months, or who buy and sell a number of properties in a short window.
Since its recent change to its administrative policy, requiring anyone claiming the Principal Residence Exemption to declare this on their returns when they did not previously, the CRA has another tool for locating potentially questionable real estate transactions.
What will this look like for taxpayers’ subject to this enforcement?
Depending on the issues and the amounts involved, audits for real estate taxes can vary in complexity and procedure. New Housing Rebate audits often take the form of a simple letter requesting documents and a telephone call or two and are typically conducted by junior agents. In Ontario, this almost always means a dispute over $24,000 plus interest. Large audits for HST on the sale of new homes can involve hundreds of thousands of dollars or more in HST alone, and are conducted by more senior, specialized auditors.
The CRA may or may not combine audits for HST and income tax under one auditor, and typically do so in middle-of-the-road cases involving one-or-two new homes and $50,000-$200,000 of tax. However, where the CRA doesn’t, an audit for income tax will almost always follow an audit for HST, and voice-versa.
Regardless of the details, a Canadian Tax Lawyer who knows these issues knows how to manage these disputes in a cost-effective manner.
It is extremely unusual for enforcement of taxes on the sale of real estate to take the form of tax evasion charges. While taxes on the sale of housing are not exempt from the criminal tax evasion provisions, the government would simply need to prove too many things that are difficult to prove (specifically, that the taxpayer did not intend to move into the Property and that he knew that these intentions rendered the sale taxable beyond a reasonable doubt).
That said, CRA will often impose “gross negligence penalties” of 50% (for income tax) or 25% (for HST) of the unreported tax. This is, in our view, often aggressive, and some auditor’s approaches of assess-first-and-ask-questions-later to penalties leaves many clients needing a Tax Lawyer to represent them in the audit, objection, or appeal to tax court.
Kalfa Law’s Tax Lawyers are well-positioned to handle real estate audits, Objections, and Appeals. Located in Toronto, at the center of a property-flipping hotspot, we regularly assist clients faced with housing audits for Income Tax, HST, or both.
Tax lawyers can provide a lot of value in real estate tax disputes. Whether this means re-qualifying you for the Principal Residence Exemption or New Housing Rebate, fighting unfairly-assessed penalties, negotiating a resolution you can afford with appeals agents or the Department of Justice, or representing you in the Tax Court of Canada, Kalfa Law knows the process and how to fight the CRA when over housing issues.
If you have been audited or assessed by the CRA for any real estate taxes, or if you are concerned that you may be and are considering amending your old returns, contact Kalfa Law today for a consultation.
-James Alvarez, BA, JD
James Alvarez is a tax lawyer working for the tax law group of Kalfa Law.
© Kalfa Law 2019