The Canada Revenue Agency (CRA) continues to follow through on the crackdown it announced last year on people who fail to report income from real estate transactions.
The agency says that from April 2015 to March 2017, real estate transaction audits found $329.4 million in assessed income that had not been reported. That resulted in more than $17 million in penalties, “primarily associated with Canada’s two major real estate markets in Toronto and Vancouver,” says the CRA.
The agency says it conducts audits on real estate transactions on a regular basis, “including in regions of Canada where economic factors may increase the risk of non-compliance.” In 2015 it doubled its efforts on the real estate sector in B.C. and now it has started a review of 500 high-dollar-value real estate transactions in that province “to uncover any tax issues that may not have already been identified.”
If a taxpayer knowingly makes a false statement when filing a return, they will be assessed a penalty equal to 50 per cent of the additional tax payable. In the last two years, 885 such penalties were assessed. The largest penalty was almost $2.5 million.
In addition to income tax, the CRA also checks to see if GST/HST payments have been made. It also reviews whether rebates that have been claimed for new homes or rental housing are legitimate.
In Ontario, the agency looked at 14,735 files for the GST/HST New Housing and New Residential Rental Rebates programs, recovering $190.8 million. In B.C., 2,546 audits recouped $10.8 million.
“Builders of new residences or rental properties are required to collect and remit the GST/HST to the CRA when they sell, rent out for the first time, or appropriate the property for personal use,” says the CRA. “Additionally, purchasers of new residences must ensure they abide by the rules when applying for new housing rebates.”
Builders of new or “substantially renovated homes” must charge and collect GST/HST when the home is sold and report the tax.
“If a builder leases a new or substantially renovated home, the builder is deemed to have sold the home to themselves. The GST/HST is payable and collectible at once on the fair market value of the home, including the land value, and the builder must report that tax to the CRA,” says the agency.
Most resale homes are exempt from GST/HST, but “there may also be GST/HST implications for flipping transactions, if a property is new or has been substantially renovated,” says the CRA.
There were 2,110 Ontario files audited for income tax compliance, with $30.4 million recovered, while in B.C. 288 income tax audits yielded $12.7 million in unreported taxes.
Capital gains on the sale of a taxpayer’s principal residence are generally exempt from taxes. However, beginning with the 2016 tax year, taxpayers who sell their principal residence must report the sale when completing their income tax returns.
“For the sale of a principal residence in 2016 or later tax years, CRA will only allow the principal residence exemption if you report the sale and designation of principal residence in your income tax return. If you forget to make a designation of principal residence in the year of the sale, it is very important to ask the CRA to amend your income tax and benefit return for that year. Under proposed changes, the CRA will be able to accept a late designation in certain circumstances, but a penalty may apply.”
The agency says a non-resident who invests in property in Canada “is liable to pay tax on gains that arise from the sale of that property and is generally not eligible for the principal residence exemption.”
The CRA determines a person’s residency status on a case-by-case basis, considering their residential ties in Canada, the purpose and duration of their visits outside of Canada and their social and economic ties outside of the country.
“Residency status should not be confused with citizenship,” says the CRA. “Non-residents only have to report their Canadian-source income, unless a tax treaty provides otherwise. An individual’s residency status is therefore essential in determining what income must be reported.”
Taxpayers who think they have made a mistake or who forgot to report real estate income can correct the record here. They may also be able to take advantage of the Voluntary Disclosures Program where the CRA says it may “offer you a second chance to make things right.”
The agency says it is continuing to strengthen relationships with the provinces, territories and municipalities to exchange information about real estate transactions, “thereby enhancing the CRA’s ability to combat tax evasion and avoidance.”
“Our government has committed to protecting the fairness and integrity of the tax system for all Canadians, notably by cracking down on tax cheating in real estate transactions,” says Minister of National Revenue Diane Lebouthillier. “This means that, without exception, every taxpayer abides by the same tax laws.”
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