How the Canada Revenue Agency addresses non-compliance in the real estate sector

The CRA takes into consideration whether the income reported on tax returns is sufficient to support a taxpayer’s lifestyle, including the cost and maintenance of real estate.

The CRA can establish correlations between a taxpayer’s reported income and their lifestyle. The acquisition of expensive assets, such as a high-end home, without an obvious income source, can be an indicator of potential unreported income on income tax returns.

People who buy and resell homes within a short period for a profit are often engaged in property flipping. The CRA acquires and analyzes third-party data and has found that some flips are not being reported or are being reported incorrectly. The profits from flipping real estate are generally fully taxable as business income.

There are three main categories of individuals engaged in this:

Professional contractors or renovators – They rapidly buy and sell real estate at a profit (sometimes demolishing or renovating the property).

Speculators or middle investors – They buy a property before its construction is completed and then assign the right-to-sell clause that is in the contract to another speculator or the final buyer. This is called "shadow flipping." It can occur many times between the first sale and the final sale of a property. The original seller often does not know that their property has been assigned to another buyer until the closing date.

Individual renovators – They buy real estate, renovate it, and live in it for a short time to claim the principal residence exemption before selling it for a profit.

If you make a profit on the sale of real estate, you may realize a capital gain. All capital gains, exempt or not, must be reported on Schedule 3, Capital Gains of the T1 Income Tax and Benefit Return. If you own more than one property at any given time, only one property is eligible for the principal residence capital gains exemption for any given tax year at the time of sale.

More information concerning the principal residence exemption, including designation of a property as a principal residence can be found in Income Tax Folio S1-F3-C2, Principal Residence.

A non-resident who invests in property in Canada is liable to pay capital gains tax on profits from the sale of that property and is generally not eligible for the principal residence exemption.

It is the responsibility of the buyer of the property to know whether the seller is a Canadian resident or a non-resident. Usually, the notaries or real estate lawyers who complete the legal documents associated with real estate transactions have the responsibility to complete these verifications.

A purchaser who buys a property from a non-resident seller should request, from the seller, a certificate of compliance issued by the CRA, prior to releasing the funds for the purchase.  If not, the purchaser could be held liable to pay the CRA any unpaid income tax on behalf of the seller.  More information regarding the sale of taxable Canadian property by non-residents of Canada is available in the CRA’s Information Circular Procedures Concerning the Disposition of Taxable Canadian Property by Non-Residents of Canada – Section 116.

An individual’s residency status is critical in establishing their Canadian tax liability. Residents of Canada must report their worldwide income from all sources to the CRA. Non-residents must report their income from Canadian-sources only.

An individual’s residency status is determined on a case-by-case basis, considering many facts which include:

• Residential ties in Canada
• Purpose and duration of visits outside Canada
• Social and economic ties outside of Canada

Residency status should not be confused with citizenship. For example, a citizen of a country other than Canada who has significant residential ties in Canada may be deemed to be a resident of Canada.

For more information, go to Income Tax Folio S5-F1-C1, Determining an Individual's Residence Status.

Generally, the builder of a new or substantially-renovated home must collect GST/HST when the home is sold and remit that tax to the CRA.

If a builder leases or rents out a new or substantially-renovated home, the builder is deemed to have sold the home to themselves. The GST/HST is payable at once on the fair market value of the home, including the land value, and the builder must remit that tax to the CRA. Additional information, including exceptions to this rule, can be found in the CRA’s publication, GST/HST memorandum 19.2.3 Residential Real Property – Deemed Supplies.

In most cases, the sale of used housing that does not undergo a substantial renovation, is exempt from GST/HST.

If you buy or build a new home, or significantly renovate an existing home, you may be entitled to a GST/HST rebate if you either:

1. Live in it as your principal residence (New Housing Rebate); or
2. You lease or rent it (New Residential Rental Property Rebate).

However, if your intention is to flip the property you may not be eligible for a rebate and you must charge and remit GST/HST on the sale of the property.

One of the main conditions for the new housing rebate is that the house you buy or build is used for you or your relative's primary place of residence.

If you buy or build a new house in Canada, but your primary place of residence is outside Canada, then your house in Canada would be a secondary place of residence and would not qualify for the new housing rebate.

Developers are considered persons or entities who acquire vacant land or existing constructed real properties (to be demolished) and sell the developed land or parcels to others. Land development is different from construction or housebuilding, although some developers also manage the construction process or engage in housebuilding. Land developers work with different counterparts along each step of this process. This could include municipalities and city planners, surveyors, inspectors, contractors, lawyers, and others. Land development generally has significant income tax and GST/HST implications.

All properties, including a principal residence, sold in 2016 or later must be reported to the CRA. The designation of a property as the principal residence is determined by completing Form T2091 (IND), Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust) and is reported on Schedule 3. For the sale of a principal residence, the CRA will allow the principal residence exemption only if the individual reports the disposition and designation of their principal residence on their income tax return.

An individual with a license, permit or registration issued under provincial or territorial legislation that authorizes them to act on behalf of others with respect to the brokerage business for purchase, exchange, sale or rental of houses, apartments, commercial buildings and land. Realtors are included in our risk-assessed populations, due to the high level of transactions, inherent in a group whose main revenue stream is generated through the sale of real estate.