Non-Resident "Flippers" beware. A recent article showed up in my inbox that may be of interest to those non-resident investors who are thinking of cashing out quickly by "Assigning" or "flipping" your pre-bought condo prior to taking posession of it.
Memo to my real estate contacts:
Canada Revenue Agency has – somewhat belatedly – begun reviewing real estate assignments. We’ve had a couple of clients tagged for what appeared at first to be full audits – they got standard CRA audit letters requesting a long list of documents. We contacted the auditors and objected to the extent of their enquiries (our standard procedure). At that point, the auditors admitted that what they were really interested in was a real estate assignment. We arranged a meeting.
We endeavored to brief the clients thoroughly on the tax issues and how they might respond. We then met with the auditors, bringing along the documents pertaining to the purchase and sale (assignment). The clients were subjected to a fierce grilling by the auditors about their reasons for buying and selling the property. The auditors were attempting to make a case for re-characterizing the profit as income rather than capital gains. In other words, they wanted to tax the whole gain rather than half.
In one case, the clients were able to present evidence that their original intention was to complete the purchase and rent the property and that this intention had been thwarted by changing circumstances. The auditor was clearly skeptical and attacked their evidence aggressively. The clients held their ground and made a good argument – much to the auditor’s frustration. However, one of these clients works in the real estate industry – which counts heavily against them in this case.
The other clients didn’t do so well. They were not able to present any evidence of their investment intentions at the time of purchase or explain why they later changed their minds and assigned the purchase agreement to another party. The auditor (different one in this case) as much as told them that they would probably be reassessed on income account, as it was obvious to him that they had just flipped the property This auditor also told us that he was auditing a couple of dozen other assignments in the same building.
Neither case has been settled yet. Clients could appeal a reassessment, but we have advised them that the probable outcome would not justify the costs of an appeal.