Real estate flippers beware, the taxman is watching
With the economy in turbulence, some Canadians have openly started to wonder whether our housing market may be next. Despite that possible scenario, the temptation to buy, renovate and then sell real estate at a profit is still irresistible for many.
Anyone interested in flipping should be well aware that if you are successful in making a profit from your real estate activities, the taxman will want a piece of the action. If the sale is treated as a capital gain, 50% of that profit will be taxable, or if it is treated as business income, 100% of the profit will be subject to tax.
The Income Tax Act itself has no criteria to distinguish when profits from real estate activities are taxed as business income or capital gain, though the case law has developed a number of factor that take into account in making this distinction.
They include:
- nature of the property sold
- length of time the taxpayer owned the property
- frequency & number of transactions carried out by the taxpayer
- improvements done to the property by the taxpayer
- intention of the taxpayer at the time the property was acquired
One Montreal resident found herslef in tax court against the CRA to dispute CRA reassessments in which she disposed of multiple properties. she initially reported the profits as capital gain, but the CRA & the Judge looked at it as business income (which would then make her profits subject to 100% taxable business income) based on the criteria mentioned above.