In my previous post, I mentioned that you may get taxed based on 100% of your income. I will assume that 99% of the reader passed up on this because that’s what humans do. They subconsciously skip things they do not comprehend. Therefore, I would dedicate this post to this very subject, Tax on 100% of your property flipping income.
Summary – If you are a recent immigrant or a real estate agent, be prepared to get taxed hard.
CRA views your income as business (100% tax) when you satisfy the following:
- Adventure of trade – A business has risk. Calculated risk is still risk. The risk of a loss and a risk of losing everything. When you purchase a real property and CRA deems that you took on significant risk in doing so, i.e. those that borrowed to their noses, and flipped for a gain. That is a business risk and thus a business transaction.
- Occupation – Very important here. They ruled and had been judged and ordered, that real estate agents that have sold any property of their own, not their principle residence, ought to be taxed as business income. No argument here. Sorry folks!
- And then there’s the duration of how long you had it and so on so forth (a laundry list of BS against you). But the above 2 points are the most critical.
Definition of Capital Income – CRA defines capital income like a tree that grows fruit. You bought a tree (House) and it grows you fruits! (Money). And sorry folks but that money isn’t capital appreciation, its rental income. Very different!
What this means? Do not ever and ever think CRA don’t have the tools to conduct their search of potential culprits. Technology have come very very far, especially in such a tax heavy country. Call them incompetent but they are competent enough to target special groups. CRA can do the following:
- Filter down all people that have sold property in the year
- Filter down to all those taxpayers that have reported business income as a professional real estate agent.
- CRA have complete, and I repeat, complete access to the land registry, land transfer tax transactions, and every single human being that have transacted in the history of Canada and logged in TREB, OREA or whatever you call it. Seriously. It’s very transparent. See this: http://www.cbc.ca/news/business/treb-court-ruling-1.4428262
- From this list, they can find all that have sold in assignment
- All those that have transacted
- And everything else, perhaps even your relatives.
So if you are anything of the above, be very prepared to receive a letter from CRA to do an audit on you. You may as well sell now to prepare those taxes. But don’t worry, there won’t be a dark van parked outside your door to nab you lol.
Also, I would like to take this chance to clear a VERY COMMON misconception of the principle residence rule amongst real estate agents. The misconception is so common that if you have been fooled by a person telling you this fact, you may as well sue for misinformation and professional negligence.
The misconception is this: That if you lived at a property for more than one year, it is considered a principle residence and hence you can enjoy the flipping income tax free!
The reality is far from this beneficial. This is a GST rebate rule. Meaning you are entitled to a GST rebate on a residential property if you had bought it from a builder. NOT principle residence exemption!!
Principle residence is this: If you owned 2 property at one point of your life. You SHARE the years of principle residence exemption amongst them. If you designated one property for say, 2 years as a principle residence, the other property LOSES 2 years of it. You will get taxed for the 2 years you had lost. It’s simple equilibrium. It’s mathematics. You cannot grow the number of years of principle residence lol.
Immigrants – why are they a target too?
Our parents have taught us that real dough lies in real estate and land. Our own 1% are also real estate moguls. US president himself is a real estate mogul. What does this mean? This means that when a new immigrant arrives, they aren’t gonna flip burgers, or get a PhD, CPA, MD or whatever, 50% (conservatively speaking) of them would be venturing into real estate as a way of doubling their asset, be it a simple condo or a suburb house.
CRA knows this! When you are reporting family income of $nil, have a bank account of $1M dollars, and have shown in their land registry record that you have purchased and sold a property, what do you think they gonna do? It’s obviously an adventure of trade. 100% tax. Period. On the bright side, the case to argue is much easier than if you were a real estate agent.
The real flaw here is that, 99% of those that did venture into banging a buck in the real estate market, went on to get themselves a OREA licence because they thought they could save on commission fees and access to industry secrets/inside information. So if you had done that, then your situation just got 2x harder to fight.
If you are one of the above, and have wasted your money on something stupid, then be prepared to pay the tax damage. If you rolled that snow ball into another property, you can sell it. If you have it in a GIC, then you are prepared to pay it.
But hey, why hate tax? You made some money, you pay the tax, its all legitimate and legal. Embrace it, don’t fight it. That blue sky and green trees don’t come free, and OHIP too.
Do email us at firstname.lastname@example.org though if you want to fight it til the end of light. Like anything in life, there are ways to resolve it.
The Competent Team Against Incompetent CRA