Recent news reports show that Canada Revenue Agency (CRA) is cracking down on condo flipping in Toronto. It turns out that Canada Revenue Agency is reviewing a few thousand purchase/sale transactions that may potentially involve pre-construction condo flipping.
CRA is determining whether specific formal audits are required in order to uncover tax evaders. Essentially, CRA is cracking down on condo flipping, particularly in the Toronto area. The actual practice of condo flipping is also referred to as “assignment sales” or “shadow flipping”.
Condo flipping is the act of purchasing a condo directly from a developer, and selling the unit to another buyer before the unit is even completed. According to CRA, the profits from flipping any piece of real estate are considered to be taxable as business income or as a capital gain.
Due to tax avoidance, CRA is cracking down on condo flipping
Because of the red-hot real estate markets in Toronto and Vancouver, purchase/sale transactions have been undergoing greater scrutiny by CRA. With experienced audit teams, CRA is cracking down on condo flipping, with a view to preventing the negative effects of realty tax avoidance.
Today, the Canada Revenue Agency has new technologies and computers to effectively access and analyze market data in real estate. Inasmuch as CRA does have a focus on tax avoidance issues, there is added interest in the after-effects of condo flipping with respect to affordability issues.
Affordability crisis in the Toronto and Vancouver markets
The average sale price of a condominium in Toronto rose more than 20% from the previous year.
And while prices in Vancouver tend to be higher, the percentage increase is similar. Some experts have drawn a connection between speculative condo buyers and the dramatic rise in sale prices.
The notion that “condo-flippers” are making money and not paying applicable taxes is disturbing on many fronts. This is exactly why CRA is cracking down on condo flipping. It creates a more balanced market for all buyers and sellers while having an effect on the speculation going on.
Ontario registry for pre-construction condominium sales
The Ontario government would like the Canada Revenue Agency to better enforce disclosure of “assignment sales” in order to prevent tax avoidance. As such, both Ontario and British Columbia have suggested a registry for pre-construction condominium sales (and assignment sales).
Clearly, the registry option is one of many, as the provinces look into effective ways of assisting the federal government with investigation and audits. A registry would enable both provincial and federal governments to ensure full disclosure, therefore discouraging condo flipping.
The perils of pre-construction condominium flipping
Pre-construction condo flipping could well be audited by CRA. And while outstanding taxes will have to be paid, a potentially significant penalty could also be assigned (not to mention criminal charges for tax evasion). Legally, individuals are required to report all real estate sales.
For those who did not properly report real estate sales to CRA, or did not correctly pay taxes on real estate profits, it’s best to address these issues immediately. For some, it may be valuable to employ the services of tax professionals to mitigate any interest or penalty charges.