With the real estate market continuing to soar in some parts of Canada, the government remains concerned with taxpayers who purchase residential real estate with the intention of \u201cflipping\u201d it \u2014 selling it in a short period of time to realize a profit. Under Canadian tax law, when properties are flipped in this manner, the profit is fully taxable as business income. In other words, taxpayers aren\u2019t eligible for the 50% capital gains inclusion rate nor the principal residence exemption (PRE).<\/p>\n
In recent years, the Canada Revenue Agency (CRA) has been cracking down on perceived abuse of the exemption, most recently with a letter campaign. The agency sent letters to those \u201cwho may have applied the principal residence exemption in error.\u201d Beginning in January 2022, educational letters were sent to approximately 1,700 taxpayers who claimed the PRE in two specific scenarios.<\/p>\n
One of the letters was sent to taxpayers who claimed the PRE in both their 2018 and 2019 tax returns. The letter identifies the properties on which the taxpayers claimed the PRE and explains that when you sell your home, you do not usually have to pay tax on any profit from the sale because of the PRE; however, if you buy a property with the main intention of selling it, you will owe tax on any resulting gain (or profit). The CRA further points out that, in these situations, the gain on the sale may be considered business income, in which case it\u2019s 100% taxable, or could be considered a capital gain, in which case only half the amount needs to be included in income.<\/p>\n
A second educational letter was directed at taxpayers who claimed the PRE and had previously reported gross rental income on their returns.<\/p>\n
Both letters politely ask the taxpayer or their representative to \u201creview\u201d their return \u201cto ensure that you accurately reported your real property dispositions and that you were eligible to claim the principal residence exemption for both properties.\u201d The CRA encourages taxpayers who need to make any corrections to change their returns, and indicated it will follow up by phone in the coming weeks.<\/p>\n