We have been warning for many years now that the Canada Revenue Agency (CRA) has been placing a renewed focus on real estate audits. These real estate audits can cover real estate investors, realtors, developers, and contractors, among others, across the country. This is resulting in a significant uptick in taxes and penalties for those in the real estate sector found offside the rules. Headlines are reflecting this:
- 2018 – CRA cracks down on tax cheating by real estate flippers
- 2018 – Canada’s taxman becoming more aggressive with real estate tax evasion in hot Vancouver and Toronto markets
- 2016 – The CRA is cracking down on real estate tax dodgers in Canada’s red hot market
With programs like the condo audit project in Toronto and Vancouver, the CRA has been identifying, and issuing reassessments and penalties in greater numbers. Pre-construction assignment sales and the real estate sharing economy (vacation rentals) adds complexity and the CRA wants to ensure the tax obligations are met in these cases.
The CRA recently noted:
- CRA audits identified $592.6 million in additional taxes related to the real estate sector in the past 3 years.
- CRA auditors reviewed over 30,000 files in Ontario and British Columbia, resulting in over $43.7 million in penalties in the past 3 years.
- In 2017-2018, CRA assessed $102.6 million more in additional taxes than in 2016-2017, and penalties increased $19.2 million.
These numbers can be daunting and highlight to real estate investors that they must have their accounting, tax, and record-keeping practices in top shape.
What does the CRA focus on for real estate audits?
Here are just a few examples of the tools and triggers that the CRA is using when conducting real estate audits:
- Legal tools such as “unnamed persons” requirements to uncover unpaid income taxes – property developers and builders must release information about purchases in pre-construction assignment sales.
- New reporting requirements on personal tax returns when you sell a principal residence.
- Owning expensive properties but having a low income (although this can be perfectly legitimate).
- GST/HST on assignment sales of condominiums.
- Comparison of utility usage at places claimed to be a primary residence. If the utilities aren’t in your name, utility usage is abnormal, you were never in the building, and so on, the CRA is not going to look kindly on this tax avoidance strategy. For investors claiming that a property is a personal residence, vs a real estate rental, to avoid a capital gain, or an inclusion into income for a flip, recent cases have come down hard on those who are perceived to be cheating the system.
- Auditing every single GST/HST Housing rebate, which we warned about in 2016.
- Asking construction stores, such as Rona, for a list of their contractors.
- Multiple years of tax losses claimed on properties.
What can you do to avoid problems with real estate audits?
- Be honest and ethical in your business dealings and reporting to the CRA, but also be smart.
- Get the right advice before completing transactions. Getting final tax advice from your realtor on whether GST/HST applies to condo assignment fees (it does), is not a good strategy.
- For property flipping, ensure you are reporting the income correctly. This is not normally a capital gain, where you are taxed on 50% of the gain. Instead this must be taken into income at 100% of the profit, which may be good or bad.
- Ensure you have a good system in place to manage your record-keeping. If the CRA finds you cutting corners in one area of your real estate business (e.g. improperly filed GST/HST rebates, late-filed returns, or challenges in finding requested documents), this can lead them to look, and potentially find, more areas to audit and reassess. If nothing else, it absorbs time and money.
- Get help with your documentation if you are in doubt, particularly for high-audit transactions such as GST/HST rebates.
George E. Dube, CPA, CA
Tax Partner, BDO Canada
Real estate accountant, real estate investor, speaker, author