With Parliament back in full swing (albeit only for two more weeks until they break for a six-week winter recess), the Liberals could soon be formally introducing their anti-flipping tax in an effort to “reduce speculative demand in the marketplace and help to cool excessive price growth,” and make it easier for the Canada Revenue Agency to reassess perceived abusers of the principal residence exemption (PRE).
First promised as part of the party’s 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, and a death, divorce, separation, serious illness/injury or change of employment of the beneficial owner during the 12-month period.
But the tax man doesn’t need to wait for new legislation in order to go after home flippers. In recent years, the CRA has been cracking down on taxpayers who, in its view, are inappropriately claiming the PRE . If it’s determined you’re buying a home for the purpose of reselling it a short time later, you can be denied the PRE and potentially be taxed on any profits as 100-per-cent taxable business income, versus a more palatable 50-per-cent taxable capital gain.
Take the recent case of a Toronto-area taxpayer who was reassessed as a “builder” by the CRA and was assessed Harmonized Sales Tax (HST) on the sale of her condo that she had held for less than one year. In doing so, the CRA assumed she had purchased the property with the intention to sell it for a profit. The taxpayer, however, argued that she bought the property to inhabit as a principal place of residence, but changed her mind when she got engaged, married and moved to the United States.
The taxpayer’s saga began back in 2007 when she signed an agreement with a builder to purchase a pre-construction townhouse for $413,000 in Markham, Ont. It was her intention when she signed the purchase agreement to occupy the property as her residence. She ultimately 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, back in December 2010, she wasn’t ready to alter her original plan to live in the property.
As time progressed, the taxpayer’s relationship with her then-fiancée grew and became permanent. In early 2012, she made plans to exit Canada in anticipation of her move to the U.S. She decided to list and sell the property around April 2012 and it was sold 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, moving to the U.S., where she lives to this day with her now-husband.
In 2015, the taxpayer was audited and reassessed for the 2012 tax year by the CRA for unreported business income arising from the disposition of the townhouse. The net proceeds, after the sales commission, was about $43,000 and the CRA classified this as business income, assessing tax owing of $22,000. She initially objected to that reassessment, but the CRA in February 2017 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.
How, then, did she end up in Tax Court this fall?
It turns out that in June 2018, “as a kind of ironic thanks,” the CRA 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 substantive issue before the Tax Court was whether the taxpayer should be considered a builder who made a taxable sale 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 that are 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 that were 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 she intended to live in the property, she did occupy it when it became available, and she 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 the taxpayer’s “motive at the outset was to acquire the property to sell for a profit” given the short holding period and because the taxpayer “barely” lived in the property.
Fortunately for the taxpayer, the judge disagreed, cancelling the CRA’s HST assessment. “(The taxpayer) was a single working person when she committed to buy the property in 2007,” the judge wrote. “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).”