CRA Investigating Tax on Undeclared Earnings for Flipping Offers to Purchase Real Estate in Canada
We’ve all heard the stories. In red-hot real estate markets like Toronto and Vancouver, brand-new projects, especially condo projects sell out fast. When sales open, there are lineups around the block. Desperate purchasers clutch serious deposit money in their anxious hands, hoping against hope that by the time they get to the front of the line, there will be a unit left for them to buy. Often, when sales to the public start, a 100 unit project has only 40 units left, the others are already sold. Who got to buy those units and how does that work?
Recent news reports and investigations show that long before sales to the public are opened, connected people including developer associates, realtors, and insiders have prior access for offers to purchase, tying up properties. And, in many cases, these connected buyers sell the offer to purchase or, more accurately, they ‘assign’ their interest in the offer to purchase to another buyer. They collect the difference between their sale price to the ultimate buyer and their purchase price from the developer as their ‘assignment’ fee.
This transaction doesn’t appear on any public record. Sometimes properties are ‘flipped’ or more technically, ‘assigned’ two or three more times before an ultimate buyer closes on the deal. At each stage an assignment fee is paid. Our friends at the Canada Revenue Agency (CRA) are well aware of this practice. They are further well aware that many assignments are never reported. This type of earnings is most likely straight business income and is fully taxable. What to do?
Last year the CRA obtained court orders regarding 40+ condominium projects in the Greater Toronto Area. These court orders forced the developers to provide the CRA with information about those folks who bought and sold their unit before completion. The CRA has been analysing the documentation from these 40+ projects and they fully intend to prosecute any ‘flipper’ who did not report their assignment income. Anyone caught in the CRA net will end up paying full tax on their assignment profit, interest for late payment, penalties for failing to pay, and, in some cases, those flippers will go to jail.
Is this difficult for the CRA? Will they have trouble proving their case? Here’s a quote In the Globe & Mail from William Howse, a Toronto tax lawyer
Anybody who assigns an offer, sells an offer for a profit, will be caught by the CRA. 100% guaranteed that the CRA will be able to identify the sales and the amount of the gain… For auditors, can you imagine how easy it is?
What’s our take away here in Western Canada? It’s most likely the same scenario in British Columbia’s lower mainland, where the same pressure exists in new condo developments. But, the principle applies to all monies earned on flips or assignments. Doesn’t matter that you’re not in Toronto or Vancouver and you are working on one property.
If you flip a property, don’t expose yourself. Do the right thing. Report the flip to your accountant and let him/her put the best possible spin on it with CRA. Don’t let them come after you for the tax plus interest, penalties, and potential jail time.