Only 50% of the Profit of the Condo Unit Sale is Taxable for Capital Gains
"Only 50% of the profit of the condo unit sale is taxable for capital gains, whereas the entire income from the sale is taxable if the income is classified as business income."
In recent years, the Canada Revenue Agency (the "CRA") has become more critical of real estate transactions claiming tax non-compliance has contributed to increasing housing prices. One category of transactions the CRA is examining more closely is condo flipping. CRA has had a condo flipping audit project for several years. CRA routinely contact condo developers for a list of purchasers and follows up with all of those purchasers to see if they sold the condo or are living in it. Condo flippers buy pre-build or pre-construction condo units and attempt to sell them for a profit either shortly after purchasing the unit or once construction is complete. Condo flippers may also carry out assignment sales where they assign their contract for the condo unit to a buyer before taking possession of the condo. The CRA has found condo flippers incorrectly categorizing their taxable income to qualify for lower tax rates by claiming capital gains treatment instead of income treatment.
TAX IMPLICATIONS OF CONDO FLIPPING
The primary issue for condo flippers is correctly categorizing the income earned from the sale of the condo units as business or capital gains income. Though claiming business income will allow the condo flipper to deduct certain expenses incurred in selling the unit, most condo flippers would prefer to claim capital gains income on the sale. This preference results from taxpayers paying less tax on capital gains. Only 50% of the profit of the condo unit sale is taxable for capital gains, whereas the entire income from the sale is taxable if the income is classified as business income.
The Income Tax Act does not have a bright-line rule for determining whether income is from business or capital gains. Instead, the courts have identified a number of factors which may be considered. These factors include:
The profession of the taxpayer
How long did the taxpayer own the property
The frequency and number of real estate sales the taxpayer has conducted
Money borrowed for the purchase of the property
The factors are directed towards determining the intention of taxpayer, which is the central consideration in the classification of disposition transactions. Effectively taxpayers engaging in condo flipping as a business should be claiming business income on the sale of their units. Assignments sales will virtually always be considered business income.