Excise Tax Law

Flip homes? Use warning when making use of for major residence exemption

July 15, 2021
Jason Wilson

  1. Taxes
  2. property
  3. Personal finance

Jamie Golombek: This most recent case involved a Vancouver taxpayer who bought, demolished, built, and then sold three houses in six years

Author of the article:

Jamie Golombek

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July 15, 2021 • 41 minutes ago • Read for 5 minutes • Join the conversation The Canadian Revenue Service has cracked down on taxpayers in recent years who they believe are inappropriately exercising primary residence exemptions, particularly in relation to flipping houses.The Canadian Revenue Service has cracked down on taxpayers in recent years who they believe are inappropriately exercising primary residence exemptions, particularly in relation to flipping houses. Photo by David Zalubowsk / AP Photo Files

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Speculation that the federal government might impose a tax on profits associated with your primary residence has calmed down in recent months, particularly with a possibly upcoming summer or fall election, so homeowners continue to benefit from significant tax exemption and sell profits from the sale of the Main residence.

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But, as regular readers know, the Canadian Revenue Service has cracked down on taxpayers in recent years who they believe are inappropriately using the primary residence exemption, particularly in relation to flipping houses. If you are found to be buying and selling home regularly, you may be denied the exemption and potentially taxed on all profits as 100 percent business taxable income as opposed to a tastier 50 percent taxable capital gain.

A case ruled recently this month involved a Vancouver taxpayer who bought, demolished, built, and then sold three homes in six years. The taxpayer appealed a 2019 Canadian tax court ruling.

The case first came to court in autumn 2016, resumed the following spring, and lasted five days. Between 2004 and 2010, the taxpayer bought three houses, demolished these houses, built and sold new houses. The CRA has revalued the taxpayer for its 2006, 2008 and 2010 tax years to include unrecognized net gains on the sale of these properties. The CRA also assessed the taxpayer for unreported GST in relation to the property sales. Penalties were also imposed under the Income Tax Act and the Excise Tax Act.

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Although the taxpayer is a licensed real estate agent in Vancouver, he has reported only modest amounts of income between $ 15,000 and $ 20,000 per year as a realtor during the tax years in question.

The three characteristics at the heart of this dispute share a similar factual pattern. The first property was purchased in 2004 for $ 580,000. After purchasing the property, the taxpayer obtained a demolition permit and demolished the existing house on the property. In 2005 he received planning permission to build a new house on this property. He then arranged for the new house to be built, put the property up for sale in early 2006 and sold it in April for around $ 1.4 million.

The second property was purchased in June 2006, approximately two months after the taxpayer sold the first property. The purchase price for this property was $ 890,000. He proceeded to demolish the existing house and build a new house in the country. The property went up for sale in early 2008 and sold for nearly $ 2 million in March 2008.

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The third property was acquired in August 2009 for approximately $ 1.1 million. The existing home was demolished and a new home built on the property, which sold for nearly $ 2.3 million in November 2010.

Before the tax court, the taxpayer argued that he had bought each property as a residence for himself and his son and that each property was occupied for a period of time before it was sold. He then claimed that he had sold every home because he felt his debts were too high and he wanted to pay off his debts.

But shortly after each house was sold, he ran into more debt than before. The mortgage total for the first house was $ 812,500, about $ 1.1 million for the second house, and $ 2.1 million for the third house. As the appeals court later noted, "A person who wishes to reduce their debt will not run into more debt soon after selling a home and paying off the previous debt."

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The taxpayer did not report the profits from the sale of these properties because he assumed that the houses would be his main residence and thus tax-free. Likewise, he did not report any GST obligation for the three sales, as he assumed that he was not a building contractor within the meaning of the Consumption Tax Act and that he therefore did not have to charge a GST.

The judge of the tax court was of the opinion that the statement of the taxpayer was "not credible" and that he "normally did not live in any of the three apartments for a certain period of time". As a result, the judge came to the conclusion that the taxpayer could not claim the capital gains reductions if he had sold his main residence.

“In my opinion,” the judge wrote, “it is perfectly clear from the evidence in this case that (the taxpayer) developed the three apartments as part of a real estate development business owned and operated by the owners, and that they made money from them Accordingly, profit was generated on the basis of income. "

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The tax court also found that the taxpayer was seen as the “builder of the residential complexes” and should have charged GST every time a house was sold.

The taxpayer appealed the decision of the lower court to the Federal Court of Appeals, which negotiated the case in June 2021 via online video conference. The taxpayer only asked the appellate court whether he was using the definition of a “master builder” for the purposes of collecting GST. This depended on the factual and legal determinations of the judge of the tax court as to whether the taxpayer was engaged in a trade or an adventure or a commercial enterprise.

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The appellate court reviewed the criteria to be considered in determining whether a realized gain on the sale of a property is a profit or a capital gain: the type of property sold, the length of the period of ownership, the frequency or number similar transactions, the work done on or in connection with the property, the circumstances responsible for the sale of the property and, finally, the taxpayer's motive. Earlier jurisprudence identified this latter motive test or the taxpayer's intention as "a factor of paramount importance".

After examining all of the evidence, the three-member panel of the appellate court unanimously decided that “there is no basis to undo the judge's finding that (taxpayers) are building and selling new houses with the acquisition of the land, the demolition of the existing apartments. “Thus, the taxpayer was considered the builder within the meaning of the Excise Tax Act and should have charged GST on the sale of each of the three houses.

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Jamie Golombek, CPA, CA, CFP, CLU, TEP is Managing Director, Tax & Estate Planning at CIBC Private Wealth Management in Toronto.

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