Home Flipping: How the CRA Addresses Non-compliance in the Real Estate Sector

In this week’s post, the Prasad & Company LLP team will advise readers on the topic of home flipping.

In 2015, the Canada Revenue Agency (CRA) began to closely examine the state of tax compliance when dealing with the real estate sector. Significant focus was within the Greater Toronto Area (GTA) area and Lower Mainland in B.C.

These areas had reportedly high amounts of real estate transactions. Between April 2015 and Dec. 2019, the CRA dealt out 2,322 penalties. This totaled approximately $154 million.

This post will detail the CRA’s concerns regarding the real estate sector. Along with a focus on home flipping, this post will discuss the steps one can take to correct reporting errors.

What is home flipping?

Home flipping occurs when individuals who own property purchase and resell it in a short time period with the intent of making a profit. This property flipping activity can entail three main categories.

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Firstly, spectators and middle investors pertain to individuals who purchase a property before the construction process is completed. These individuals would then execute the right-to-sell clause within the contract. This assigns the clause to either another spectator or the final buyer. Such an activity is also known as “shadow flipping,” which can occur several times before a property reaches its final buyer.

As for contractors and renovators, these parties would quickly purchase and sell a property for profit. At times, this can encompass renovating and demolishing the real estate in question.

When it comes to individual renovators, they purchase property, renovate it, and sell it with the intent of making a profit. It should be noted that these individuals also live in the property for a short time period before proceeding to sell it. This is done so they could claim the principal residence exemption. This is an income tax benefit that can be applied to capital gain upon the sale of real estate.

What are the CRA’s concerns about the real estate sector?

In addition to home flipping concerns, other real estate issues include unreported capital gains and income.

For example, the sale of property by non-residents requires compliance when it comes to paying capital gains tax. When non-residents invest in real estate and sell it for profit, they should also take note that they are typically not eligible for the principal residence exemption.

It should also be noted that the buyer of a property is the one who is responsible for knowing whether or not the seller is a non-resident. Therefore, the buyer should request a certificate of compliance from their seller. This form, also known as T2062, can be issued by the CRA.

When worldwide income is not reported, it is another concern of the CRA. While Canadian residents have to report this income, non-residents should report their income that is from a Canadian source.

It is important to take residency status into consideration and determine it on a case-by-case basis as well. This can involve residential ties, the duration of visits outside of Canada, as well as one’s social and economic ties outside of the country.

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As for property sales, an individual should report their capital gains. This should be done on Schedule 3’s capital gains section of the T1 Income Tax and Benefit Return form. If an individual owns multiple properties, then only one is eligible for the principal residence exemption for capital gains.

How do I correct a reporting error?

If a mistake was made with income tax reporting, then there exist options to remedy this.

One way to correct an error is to contact your accountant. It is crucial to have a trusted expert by your side who is certified to be a Chartered Professional Accountant (CPA). These individuals undergo various training and tests before earning their CPA designation.

They also meet international standards and are valuable to any organization. Along with their skills in financial management, experts with a CPA designation are able to use their soft skills to help you meet your business goals.

After requesting an amendment, the CRA would process it. Depending on the complexity of the request, the processing time can vary. For example, the CRA may need to contact your accountant for more information. In other cases, the processing time may take longer because the request is for either a bankruptcy return or a carryback amount.

Having an expert at Prasad & Company LLP team be your representative in these matters would be a step in the right direction. Each accountant is dedicated to accuracy and is up-to-date with the latest industry standards.

How do I contact Prasad & Company LLP?

In order to avoid financial penalties, individuals engaging with the real estate sector should comply with the policies set out by the CRA.

Prasad & Company LLP provides help through helping clients correctly fill out forms. The firm also prides itself on having experts who have worked within the accounting and business industries for countless years. Proudly a Canadian firm for over 30 years, Prasad & Company LLP is always ready to deliver the best and most professional services possible.

To contact an accountant with a CPA designation, you can give the firm a call at 416-226-9840. The toll-free number is 1-888-550-TCAS.