As the Canadian real estate industry from province to province continues to thrive, there has been vast growth of pre-construction condo buildings in large cities such as Toronto and Vancouver. In Toronto alone, there are over 80 approved new condo towers that will be built over the next 5 years. Many of these units will be purchased and the rights to the Purchase Agreement will be assigned to new buyers, before the building has completed construction, for a profit.
Typically, the Assignor of the contract will earn a profit and this profit (or loss) must be reported to the Canada Revenue Agency (CRA) and then tax must be paid on income. The assignment, in the eyes of the CRA, is considered a disposition of property. A major concern when reporting income from an assignment is whether the profit is considered a capital gain or business income. If income is considered a ‘capital gain’ or ‘capital loss’, it is subject to special treatment under the Income Tax Act, allowing only 50% of the capital gain as taxable. Should this income be considered business income such that the full income is taxable?
Generally, capital gains treatment occurs with the disposition of an asset that was acquired to be held for a long term, to either produce income or be used personally, whereas business income treatment occurs where the asset was acquired with the sole purpose to be sold at a profit. To determine whether the income from assignment is considered a capital gain or business income, intent and a number of factors will be reviewed by the CRA to determine the nature of income:
The taxpayer’s intention related to the property at the time of purchase and the manner in which it was carried out.
The nature of the taxpayer’s profession, business and history in dealing with real estate transactions. Often those in the real estate industry are deemed to earn business income as they are involved in the industry.
Property flipping - those who buy and resell homes in a short period of time for a profit tend to be treated as earning business income.
The period of ownership.
Reasons for, and the nature of, the sale, etc.
In the past, many assignment transactions were not disclosed to the CRA however, in recent years with the booming real estate industry, the CRA has started to investigate assignment transactions. It has also begun demanding that building developers release the list of individuals on Registered Deeds in order to discover assignors who have not reported profit. We recommend that any income from the sale of Canadian real estate be reported to the CRA, the failure of which may result in penalties, assessed arrears interest and increased scrutiny.
Additional Considerations for Non-Residents of Canada that Assign their Rights to a Unit
Since Canadian real estate, or an option to acquire an interest in Canadian real estate is considered taxable Canadian property, the sale of either by a non-resident of Canada is reportable in Canada. As the non-resident of Canada is disposing (i.e., assigning) their interest in taxable Canadian property, there is a requirement to submit a Certificate of Compliance application within 10 days of the assignment transaction. Failing to submit the application in a timely fashion will result in a maximum penalty of $2,500 per taxpayer. Further, the purchaser may be liable to withhold and remit 25% of the gross proceeds as a federal tax withholding (plus an additional 12.875% of Quebec tax withholding for Quebec real estate), absent a waiver.
Cross-Border Tax Services
At Trowbridge Professional Corporation, we specialize in cross-border tax services and would be pleased to assist with the tax compliance requirements related to the sale of your Canadian property.
Written for Trowbridge Professional Corporation.
Contact Trowbridge Professional Corporation at Info@trowbridge.ca or contact me directly at Ruby.Chouhan@trowbridge.ca
[Disclaimer: Please keep in mind that everyone’s specific situation is unique. Always seek the advice of a qualified tax advisor. Trowbridge has been providing tax expertise for over 15 years, on a global basis, and provides this article as general information, believed to be correct at the time of publishing. This information should not be used without consulting a tax specialist].