Selling Real Estate! When is it tax exempt, 50% taxable or 100% taxable?

20 Aug 2019

David Reine, CPA, CA - Accounting Partner

Much has been made recently about the selling of residential real estate and the need to report those sales to the Canada Revenue Agency (CRA). What is not always fully understood, when is the sale tax exempt (where an individual claims the principal residence exemption), 50% taxable (where the sale is considered to be a capital gain) or 100% taxable (where the proceeds are considered to be on account of business income).

The CRA is continuing to look at non-compliance in real estate transactions. There has been a lot of news about the new CRA reporting requirements when claiming the principal residence exemption (PRE). This is when an individual sells their primary residence. Although no tax may be owed, the sale must be disclosed to the CRA.

However, the tax situation differs when selling a property that is considered to be a rental property or another property that does not qualify for the PRE. Typically, when someone owns a residential property (that does not qualify under PRE), and subsequently sells that property, the sale triggers capital gains tax. This would apply to sales of rental properties, or to the sale of a second home or cottage.

What is less known is that the sale of the residential property could instead be taxed as business income, thereby tax is owing on the full capital gain rather than just 50% of the capital gain. In determining the tax treatment as a capital gain or business income, the CRA will look at what your intent was when originally purchasing the property. The CRA often considers the sale of pre-construction properties, or a sale when flipping a property, as business income.

Not only is more tax owing when a sale of property is considered to be on account of business income, but it also impacts the treatment of HST. You may have thought or been told that you were entitled to the HST rebate, which can be as much as $30,000, only to find out that you are no longer entitled to it instead owe $30,000 back to the government.

One trap that often occurs, is when an individual buys and sells a home in a short period of time. Frequently, the CRA has been assessing this as a business intent (i.e. property flipping). In case, the CRA treats the gain on the sale of property to be 100% taxable, and further assesses HST, along with penalties and interest for the non-reporting of HST. This assessment can significantly eat into your profits.

Selling real estate can be tricky. The more documentation you have to demonstrate your initial intent the better. With CRA's increased scrutiny on real estate sales, it is becoming more and more likely that your would need to prove this initial intent to the CRA if a property is sold.

It is thereby essential to inform your accountant of all the facts and circumstances when purchasing and selling a property, as the tax treatment will differ depending on the particular situation. For further information on this, contact us.