tax penalty / Erhui1979

When Parliament resumes at the end of January, one of the first items on the Liberals’ agenda for 2022 could be the formal introduction of the anti-flipping tax on residential homes. The measure would “reduce speculative demand in the marketplace and help to cool excessive price growth,” the Liberals said. It would also make it easier for the Canada Revenue Agency (CRA) to reassess perceived abusers of the principal residence exemption (PRE).

First promised as part of the Liberals’ pre-election platform, the plan calls for removing the PRE for individuals who sell their principal residence within 12 months of purchase (or transfer of title), and treating the gains from the sale as taxable capital gains beginning in the 2022 tax year. There would be some notable exceptions: the sale of vacant land; the sale of a home destroyed, condemned or damaged due to natural or man-made disaster during the 12-month period; the owner’s previous home having been destroyed or condemned; or a death, divorce, separation, serious illness/injury or change of employment of the beneficial owner during the 12-month period.

But the CRA doesn’t need to wait for new legislation in order to go after home flippers, because in recent years the agency has already been cracking down on taxpayers who, in its view, inappropriately claim the PRE. If it’s determined that a taxpayer is buying a home for the purpose of reselling it a short time later, the CRA can deny the taxpayer the PRE and potentially tax them on any profits as 100% taxable business income, versus a more palatable 50% taxable capital gain.

Take the recent case of a Toronto-area taxpayer who was reassessed as a “builder” by the CRA and charged harmonized sales tax (HST) on the sale of a condo that she had for under one year. The CRA assumed she had purchased the property with the intention to sell it for a profit.

The taxpayer’s troubles began back in 2007 when she signed an agreement of purchase and sale with a builder to purchase a pre-construction townhouse for $413,000 in Markham, Ont. When she signed the agreement, it was her intention to occupy the property as her residence. She took possession of the property in May 2011 and physically began residing there that same month. Although she met and started a relationship with her current husband — a U.S. citizen — in December 2010, she wasn’t ready to alter her original plan to live in the property.

As time progressed, the taxpayer’s romantic relationship developed and became permanent. In early 2012 she made plans to exit Canada in anticipation of her move to the U.S. to join her then-fiancé. She decided to list and sell the property around April 2012, and it was sold a couple of months later — in June 2012 — for $478,000, netting her a modest profit after commission.

After selling and vacating the property, she briefly lived with a relative in the Toronto area before emigrating from Canada in December 2012 and moving to the U.S., where she lives with her husband to this day.

In 2015 the taxpayer was audited and reassessed by the CRA for unreported business income for the 2012 tax year, arising from the disposition of the townhouse. While she initially objected to that reassessment, in February 2017 the CRA ultimately confirmed it, and the taxpayer, for reasons unknown, chose not to appeal to the Tax Court and paid the tax owing in full while living in the U.S.

Fast forward to June 2018, when the CRA, “as a kind of ironic thanks,” a Tax Court judge said, deemed her to be a “builder” under the Excise Tax Act, and hit her with $33,650 of HST (after rebate), $20,000 of arrears interest and a $2,200 non-filer penalty.

The issue before the Tax Court was whether the taxpayer should be considered a builder who made a taxable supply when she sold the property and therefore had to charge and remit HST thereon.

Under the Excise Tax Act, a builder is someone who buys a residence for the primary purpose of selling or leasing. It specifically excludes an individual who buys the property for personal use, and not for use in the course of a business or an adventure in the nature of trade.

The judge reviewed the age-old tests used in determining whether a gain realized on the sale of a property is an income gain or a capital gain: the nature of the property sold, the length of the ownership period, the frequency or number of similar transactions, the work expended on or in connection with the property, the circumstances responsible for the sale of the property, and, finally, the taxpayer’s motive. Prior jurisprudence called this latter test of motive, or the taxpayer’s intention, “a factor of utmost importance.”

The taxpayer argued that she intended to live in the property, occupied it when it became available and moved out “because of life-changing events” — her engagement and subsequent marriage, which caused her to relocate to the U.S.

The CRA countered that, given the short holding period and the fact that the taxpayer “barely” lived in the property, the taxpayer’s “motive at the outset was to acquire the property to sell for a profit.”

Fortunately for the taxpayer, the judge disagreed, cancelling the CRA’s HST assessment. The taxpayer, the judge wrote, “was a single working person when she committed to buy the property in 2007. Three years later, she met a boyfriend. They became engaged. They left the country together. They got married. As changes in circumstances go, that sequence of events is compelling to this Court, if not the [CRA].”

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the Managing Director, Tax & Estate Planning with CIBC Private Wealth in Toronto.