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After years of saving and careful thought, you have finally decided to take the plunge into a booming real estate market and purchase a brand new, luxury condominium unit in the heart of the city. By the time construction is complete, you figure you will have saved up even more toward the down payment and will be ready to start your life as a fast-paced, transit-riding city dweller.
Fast forward three years later, and your condo still isn’t completed – after numerous delays and broken promises. You have just gotten engaged to the love of your life and you are rethinking your decision to live as a married couple in a 600 square foot space. After months of debate, and the construction of the condo unit finally complete, you make the decision to sell. It certainly doesn’t hurt that you’ve made a gain from the sale – after all, there seems to be no end to the rise in housing prices. All you’ll end up doing, though, is applying that gain to purchasing the home you’ll actually end up living in.
If you had discussed this sale with your accounting and tax advisors, you would have been advised that the net gain from this sale was a capital gain for tax purposes, which is only 50% taxable. Imagine your surprise then, when you receive a letter from the auditors at the Canada Revenue Agency, possibly even a year or two later, suggesting not only that the gain on the sale should be much higher than reported on your personal tax return, but that it should also be 100% taxable as business income. The bad news doesn’t end there – the CRA also wants to add a penalty for ‘gross negligence’ of 50% of the tax on the gain to your already inflated tax liability.
You immediately pop an Aspirin and sit down as your blood pressure rises and your head pounds. This tax liability would almost wipe out the gain from the sale. Your emotions range from angry, to angrier. You thought you did everything right – how could this happen to you?
Now what? The good news is, there are ways to sort this unfortunate situation out. From my experience, it appears the CRA auditors have been given a mandate to audit in this area, likely due to the recent condo boom. The reality is there are some individuals who choose to ignore the proper tax rules and are in the business of buying and selling properties for profit, but do not report these transactions to the tax authorities correctly.
Of course most individuals – like yourself, who purchase condos with the primary intent to live in them – do not follow such practices. If you’re finding yourself having a faceoff with the CRA, your best bet is to work with an experienced tax professional. We communicate on your behalf with the CRA the facts, history and reasons behind your purchase and sale and provide a detailed and accurate calculation of the gain on sale. At the end of the day, a tax professional can provide a defensible, strong and concise argument for the proper tax treatment of the sale as a capital gain or as your principal residence and argue against any penalties suggested by the CRA auditor.
To take a recent, real-life example*, Mr. Wilson was audited by the CRA for his sale of a condo. The CRA was proposing an increase of almost $100,000 to his taxable income for the year, plus the 50% penalty for gross negligence that I mentioned earlier. These adjustments would have amounted to almost $60,000 in additional income taxes for Mr. Wilson. We sent a detailed response to this request on his behalf and the auditors decided to drop the penalty and take into account a number of expenses from the sale. The final reassessment was only for $12,000 of additional income, or about $5,000 in taxes.
Dealing with the CRA is not easy. In my experience, although the CRA auditor is usually open to compromise - provided the proper facts and reasons are in place – whatever compromise you try and negotiate is often not enough to satisfy all parties. If that is the case, contact one of our tax professionals to help you take it to the next level and appeal the reassessment from the CRA.
*Names have been changed.
Related Topics:Personal Tax; Canada Revenue Agency
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