Canada Revenue Agency Wants to Tax Real Estate Investors 100%

This could be scary news for Canada’s hot real estate market and real estate entrepreneurs. Canada Revenue Agency has launched a “Condo Project” to take a closer look at the income reporting of real estate investor in the condominium sector.

 Taxation on gain from real estate income in Canada is collected at a preferred rate. That is why any one with savings prefers to invest in real estate. Here is how the income from Real Estate is taxed in Canada.

 a). Profit from sale of a Principal residence is a tax free income; subject to you meet the criteria to claim that home as your principal residence.

 b). Profit from sale of a Rental Property or Investment Property is treated as Capital gain under the Income Tax Act. As it’s a Capital Gain, taxpayer pays tax on only 50% of the income reported on the sale of an investment property. For Example, when you sold your property, if you had a profit of $100.000, 50% of that profit is taxable. So, if you are at 46% tax bracket, your tax on the profit will be $23,000. 

Canada Revenue Agency is suggesting that many taxpayers are investing in Condo Properties and real estate investors. As a real estate investor, they are running a business of investing in condominiums and earning profits in the course of a business. CRA is suspecting that these investors are reporting their business income as an income from Capital Property and paying the preferred tax rate on 50% of the income. When they should actually be paying preferred tax rate on 100% of the income, since the income is not from a Capital Property but from a Business. 

It is a complex process that Canada Revenue Agency uses to determine if the income from Real Estate sale is of capital nature of business income. 

Here the Tug of War starts between CRA and the Taxpayer. CRA wants to classify the income as business income to collect more tax and the taxpayer wants to classify the income as of capital nature to pay less tax. 

Ultimately the taxpayer has the burden of proof to show it to CRA or at the tax court, that the income is of capital nature, if taxpayer cannot satisfy the CRA with proof that the income was capital nature, CRA will classify the income as a business income and will collect tax on 100% of the income. If CRA gets to reclassify the income as business income, they will recommend fines and interest of not reporting income properly in the first place. 

If you have to report your income from sale of a real estate property in Canada in your 2012 income tax return, it is important that you seek expert advice immediately. Cost of not seeking an expert advice could be thousand times more than cost of the advice.