What is Your Intention In Buying Property?

In Tax Court of Canada, a recent appeal sided with the person making the appeal and against CRA.

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Background: In short, Steven B. owned a townhouse in Ontario since 1998. At the time of purchase, his brother, Patrick, contributed to the downpayment, moved in and shared expenses. In and around 2006 the brothers discussed going their separate ways because of brother Patrick’s changing circumstances. So Steven wanted to sell the townhouse and move to a smaller home that was closer to his work.

The New Condo Purchase: In 2006 Steven purchased a preconstruction condo which was scheduled to close on April 27, 2008; yet the occupancy date was postponed by the builder to October 28, 2009.

Changing Circumstances: In 2008 Brother Patrick married, had a child and all lived in the townhouse. Also in 2008, their father passed away and in 2009 their mother moved in with her two sons. Steven soon refinanced the home and paid his brother for his interest in the property. Brother Patrick used the funds to buy a home for him and his family.

New Plan to Sell the New Condo Purchase: Steven had every intention to sell the townhouse but plans changed when his mother moved in. He now felt the condo he purchased was too small for them and by 2009 his plan changed to selling the new condo instead of the townhouse. Steven became the registered owner of the new condo on August 10, 2010. He now arranged to list the property for sale and the sale closed on November 2010.

Sale Results in a Questioned Gain by CRA: His gain on the sale was $13,412 and was reported as a capital gain. He appealed the Minister of National Revenue’s reassessment that this gain was unreported business income from an adventure or concern in the nature of trade, as opposed to a capital gain, so gross negligence penalties were levied against him. Tax on a capital gain is based on one half of the net gain. Tax on business income is on the entire gain after expenses.

The Court’s Decision: The tax court judge based her decision on the following four factors which are a good takeaway.

  • Intention: Steven’s intention was to sell his current property and move into the new condo. This plan was thwarted by the death of his father and his obligation to look after his mother. According to the Judge, “Therefore, this factor favors a finding on account of capital” as opposed to income.

  • Nature of business of trade of the taxpayer: Steven and brother were both transit operators. Prior jobs had no connection to real estate transactions and the townhouse was the first and only property he had ever owned until buying the new condo. Again this evidence favored capital.

  • The nature of the property: As a new condo which sold quickly after closing, “this factor favors a finding on account of income.

  • Extent and Use of Borrowed Money and length of time the real estate was held: The agreement to buy was September 2006, yet the closing took place in August 2010. Steven only borrowed money to refinance the existing townhouse to pay off his brother. There was no financing on the new condo and he could not afford to own both homes. The sale took place quickly but time between agreement to buy and closing was long: about 4 years. This factor was found to be neutral.

Decision: The sale of the new condo was determined to be a capital gain and properly reported. The appeal prevailed and CRA’s penalties were dismissed.