Tax Avoidance on Real Estate over $636 Million
To crack down on non-compliance on real estate transactions, the Canada Revenue Agency reviewed 30,000 files over the past 3 years in Ontario and B.C. They found $592.6 million in additional taxes resulting in over $43.7 million in penalties. The CRA news release dated May 17, 2018 also said, “Specifically in 2017-2018, the CRA assessed $102.6 million more in additional taxes than in 2016-2017. Penalties increased by $19.2 million from one year to the next.”
To uncover tax avoidance on real estate deals, CRA collaborates with provinces, territories and municipalities and continues to improve on tools to combat non-compliance. One legal tool to uncover taxes and GST/HST on assignment sales is their unnamed persons requirement.
So What is the “Unnamed Person Requirement?”
New homes, rental properties and substantially renovated properties are subject to HST. So Builders and Developers are required to remit the HST on selling, renting a new unit for the first time or on personally moving into one of the properties. Under the “unnamed persons requirement” issued to developers and builders, CRA can obtain the identity of any buyer who is not reporting properly for income tax and HST purposes.
As well, purchasers of new homes can apply for a new home HST rebate provided the home is used for their primary residence. In many cases, as the builder includes the HST in the price of the home and pays it on behalf of the buyer, the builder also applies for the rebate as it is taken off the price to benefit the buyer. If the buyer is not going to use the property as their primary residence, the rebate does not apply and must be paid to the builder on closing. This HST rebate provision can also get abused by some buyers.
On flipping property, any profit must be reported as business income and not as capital gain. Buyers also cannot avoid compliance by pretending to use the property as their non-taxable primary residence.
CRA is also looking closely at “pre-construction assignment sales” in which a condo or home is sold to another buyer before completion of the home or unit.
Re-assessments and Gross Negligence
Failure to properly report can result in re-assessment of taxes owing and arrears interest. For “gross negligence” a penalty of 50% of the tax avoided would be imposed. A Financial Post article dated May 25-18, by Jamie Golombek, CPA, mentions a case that involved a real estate salesperson and her granddaughter. In 2006, the salesperson purchased Unit 6 and the granddaughter purchases Unit 5. The deals both closed in June 2010 and were resold by the next month. No income relating to the condos was reported with their individual 2010 tax returns. CRA reassessed and established that the buyers failed to report business gain of $103,206 on Unit 6 and $106,025 on Unit 5. They failed to further report their profits and so CRA charged both with gross negligence.
In court, after hearing arguments, the salesperson grandmother was found guilty of gross negligence. The granddaughter a 21-year old was relieved of gross negligence as she relied on her grandmother and father, both real estate agents, to tell her if reporting her income was necessary.