In October 2016 the Canada Revenue Agency (CRA) introduced new changes to its real estate sector reporting requirements. The biggest change was the CRA’s addressing of those who were non-compliant in the real estate sector, focusing on those who don’t correctly report their goods and services, unreported capital gains, unreported income, and most importantly for real estate investors – property flipping.
Here’s what you need to know to stay in the CRA’s good graces in the wake of these added guidelines.
What is property flipping according to the CRA?
Property flipping happens when real estate investors purchase revenue-generation properties with the intention of quickly reselling them for profit. The CRA states that there are three levels of property flipping:
- Professional contractors and renovators, who buy and sell real estate rapidly, sometimes demolishing or renovating the property before they offload it.
- Middle investors or speculators, who assign a “right-to-sell” clause to another party or a final buyer after purchasing a property. This can be done numerous times before a property’s final sale, often unbeknownst to the original seller. The CRA considers this to be “shadow flipping”.
- Individual renovators, who renovate and live in their recently purchased properties with the intention of selling it after claiming a principal residence exemption.
Property flipping very quickly became a popular and attractive way for investors to earn large profits, thanks in part to Canadian real estate prices and reality shows that featured the practice. While real estate flipping isn’t against the law in Canada, the CRA states that all money made from property flipping – including income from appreciation and real estate commissions – must be reported.
What does this mean for real estate investors?
As of October 2016, any Canadian who sold a property during the fiscal year is now required to report basic sale information on the Schedule 3 “Capital Gains (or Losses)” section of their income tax return. This information includes the date of purchase, address of the property, and other details about any home sold that was claimed as a principal residence. Sellers will no longer be able to claim the principal residence tax exemption without first reporting the sale. Prior to this recent policy, the CRA did not require reporting of principal residence sales to qualify for the exemption.
The move was reportedly made in order to more effectively crack down on serial property flippers who claim investment properties as principal residences in order to gain tax exemption on their sales. Another reason for the new tax regulations is to gauge just how prevalent property flipping is in Canada, and what its potential effects (if any) are on the overall state of the real estate market.
What do I need to do to stay out of trouble?
If you consider yourself to be a property flipper, then the very best thing you can do to avoid trouble with the CRA is to be honest in your reporting of sales. By properly reporting real estate sales made throughout the year and properly claiming your principal residence, you’ll be free and clear to continue investing without worrying about a huge tax bill or penalties from the CRA.
For those who are extra vigilant about possible tax repercussions, consider hiring a Certified Accountant to review your sales activity for legalities. Relying on the advice of a bookkeeper or real estate lawyer may not be good enough, as they aren’t as familiar with the specifics of tax law as Certified Accountants are. Having a CA around tax time can give you helpful tax advice and also help to identify valuable write-offs, making them more than worth their fee.
The CRA’s recent addition of stricter property flipping-related regulations means that real estate investors need to remain vigilant with their reporting at tax time. Understanding what is considered to be property flipping, being honest in your reporting, and consulting accounting professionals will ensure that you make it through the upcoming tax season unscathed.