New principal residence reporting will help CRA home in on condo flippers
If you sold your home last year, this tax season you will be required to report some basic information on that sale on the newly-updated Schedule 3 “Capital Gains (or Losses) in 2016” of your tax return to be able to claim the principal residence exemption and have the gain be completely (or partially) tax-free. Information you are required to provide includes: the date of acquisition, proceeds of disposition and the address of the home that was sold.
You’ll recall that this requirement came about in October 2016 and represented a change in the Canada Revenue Agency’s longstanding administration position which didn’t require you to report the sale of a principal residence if the entire gain was exempt from tax. But the CRA was concerned about, among other things, its ability to track frequent purchases and sales of homes by “flippers” and wanted a way to track and review principal residence exemption claims.
For an example of what the CRA can now more easily monitor, take the recent case, decided just last month, of a Toronto taxpayer who, in 2010, sold a one-bedroom, 560-square foot Yonge Street condo and didn’t report it in his 2010 income tax return. The taxpayer took the position that the condo unit was his principal residence and therefore there should be no tax on the gain. The CRA, however, disagreed, and reassessed the disposition as taxable business income saying that the taxpayer “never resided at the condo … did not ordinarily inhabit the condo in 2010 … (and) at no time was the condo the (taxpayer’s) principal residence.”
Under the Income Tax Act, for a dwelling to be a “principal residence,” one of the key conditions is that it must be “ordinarily inhabited in the year by the taxpayer, by the taxpayer’s spouse or … by a child of the taxpayer.” As the judge summarized, “(T)he key question is whether this was the (taxpayer’s) principal residence.”
To determine this, the judge reviewed the taxpayer’s past real estate transactions.
As it turns out, the taxpayer and his spouse bought and resold a number of properties from 2007 to 2011 at a profit. On one of the properties, the taxpayer reported rental income in 2011 and a taxable capital gain on his 2011 T1 return for its disposition.
The taxpayer entered into an agreement of purchase and sale for the Yonge Street condo on Feb. 16, 2007 prior to the completion of construction of the building. He took possession of the property on May 11, 2009 and became the owner on Oct. 30, 2009 at the time of closing. One and a half months later, on Dec. 16, 2009, the property was listed for sale, with the taxpayer’s wife, acting as the real estate agent. The property sold six days later on Dec. 22, 2009 and the closing date of that sale was Jan. 12, 2010.
The taxpayer testified that the family moved to the condo in June 2009 and left in early January 2010. During this brief period of time, the taxpayer explained that he was away for most of the time because he had to go overseas for the death of his father. His wife testified that she also had to travel back and forth overseas during this period because her mother became ill. The taxpayer’s wife testified that in late 2009, the family’s two older children had decided that “in order to be supportive … they should move back home. In order to do so, the family would need a larger condo unit” and thus the decision was to put the condo up for sale.
As a result, the family explained that it moved out of the condo in early January 2010 and went to live with some relatives until they moved into another condo, which was purchased in January 2010 which they moved into in February 2010.
The judge did not believe the taxpayer’s testimony on the key point of whether or not the family actually moved to the condo for a variety of reasons. For one, it seemed that the “560 square feet one bedroom condo is pretty crowded for two parents and a university age son.”
Secondly, in responding to a CRA questionnaire, when the taxpayer was asked: “Did you reside in this property?” His answer was “no.” He was also asked for the names and ages of people who resided with him and left the answer to that question blank.
Thirdly, on the condo real estate listing, it read “Occup:”, which stands for occupancy, and next to it the word “Tenant.” As the Judge said, “if there was a tenant the family could not be living there.”
Finally, there were inconsistences with the electricity bills submitted into evidence which led the judge to conclude that “there is either no consumption of electricity after July 1, 2009 and before Dec. 31, 2009 or, for that period, someone else is paying for the electricity and that person is being billed. In either case it is incompatible with the (taxpayer’s) family living at the Yonge Street (condo).”
Since the taxpayer did not meet the requirement that he or his family “ordinarily resided at that property,” the judge denied him the use of the principal residence exemption and upheld the CRA’s reassessment.