Tax auditors have been targeting the once red-hot Toronto and Vancouver real estate markets, looking primarily for people who bought condos before they were built, intending to flip them for a profit as soon as the project is complete.
But other folks, including some who were forced to sell because their circumstances changed in the years it took for their new condo or home to be built, have been hit with the kind of massive tax bills usually reserved for real estate speculators.
Toronto tax lawyer William Howse is warning realtors in a two-page bulletin, now being distributed to brokerages, that they also could be inadvertently swept up in the net.
He cautions that if they have advised clients to cash in their condos or new homes too soon after construction is completed, even to use the gains to buy up, they could have clients sue for advice that is deemed to have run afoul of the taxman.
The Toronto Real Estate Board declined to discuss the issue, other than to say the rules are “generally clear on the amount of time one has to occupy a unit (as a principal residence) to benefit from a capital gains exemption.”
But the reality is, the law does not stipulate a specific amount of time.
Folks who’ve sold condos or houses less than a year after taking possession seem to be the prime focus of CRA auditors so far, but tax lawyers are advising clients they could be at risk of a tax bill for at least 50 per cent of any gains made if they’ve sold before living in the property 18 months to two years.
The CRA’s approach has not changed, it’s just that there have been so many more condo transactions the past few years in Toronto and Vancouver, in particular, said Sam Papadopoulos, a CRA spokesperson for the Ontario region.
“We’ve just been a little more aggressive in sending out questionnaires,” he added.
“The CRA’s challenge is to ensure compliance with the tax legislation it administers. The recent construction boom in condos and housing has garnered CRA attention to ensure that profits are reported and that GST/HST housing rebates are appropriately claimed.”
Some folks have received tax bills on the full gains. About 250 buyers in Toronto and Vancouver have been asked to refund GST and HST rebates on homes that auditors have deemed aren’t being used as primary residences.
“This is a full frontal attack on everybody out there who has bought and sold a property because values have gone up so much as a result of the real estate boom,” said Howse, corporate counsel to The Taxperts Group, a private tax-law firm, and a speaker to the real estate industry on tax issues.
There’s no doubt the recent condo boom has spawned a get-rich-quick mentality over the past few years. Even tax lawyers acknowledge they’re seeing more people with little knowledge of legal and tax requirements jump into the market.
Some have been buying and selling condos as investments, without even disclosing the deals to their accountants, or getting HST rebates on new investment properties.
For years, auditors have been using real estate databases, land registry information, building permit information and lists of purchasers provided by developers to better target those trying to avoid, or evade, tax on those gains.
But, over the past year in particular, auditors seem to be taking more of a tax first, ask-questions-later approach to even deals involving principal residences, which have been traditionally exempt from capital gains taxes, tax lawyers say.
They are seeing cases where clients bought condos or new homes years ago, in the preconstruction phase, but had to sell soon after taking possession because of extenuating circumstances such as job losses, relationship breakdowns or health reasons.
Even some with no history of buying and selling multiple properties are being treated as if they are flippers and slapped with tax bills on 100 per cent of the gains, plus 50 per penalties, said Kitchener tax lawyer James Rhodes.
He has been contacted by 10 people so far, most of whom, he said, had no idea their condo purchases were being flagged for an audit and simply filled out the questionnaire from the CRA, asking for details of all their real estate transactions going back to January, 2007.
Some 1,200 of the questionnaires have gone out in the GTA area so far this year, said Papadopoulos. All have a cover letter, he noted. It makes reference to an audit. Another 160 have gone out in the Vancouver area.
In about 250 cases, auditors have asked for immediate repayment of HST or GST rebates, so far the average is about $5,300, said Papadopoulos, granted only to buyers of new homes and condos that are intended to be their principal residence.
Howse is representing 10 new home and condo buyers right now facing major tax bills from the CRA.
One has her new home up for sale in the wake of a bout of unemployment and the breakdown of her relationship. She said she has had to pay back tens of thousands in HST rebates because she disclosed to an auditor that she has no plans to live in the house.
She’s now appealing, a process that, if the case goes all the way to tax court, could cost $10,000 just in legal bills.
But that’s the last resort, Papadopoulos stressed.
“We are not unreasonable. If you have the facts, and you can support them, then you can file an objection and you can present your case to an appeals officer,” he said. “It’s all about the facts.”
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