CRA is planning to begin aggressive real estate audits
for both income tax and GST. They will be looking at:
- Whether the disposed property qualifies for the principal residence exemption. If the CRA is not satisfied that the property has met all the requirements of the exemption, part or all of the exemption will be denied.
- Whether the gain realized on the disposition of real property is a capital gain (50% taxable) or business income (100% taxable). The distinction of capital gain from business income is often not straightforward and prone to challenge.
- Whether income has been reported in respect of an assignment of contract for the purchase of real property. If income has been reported, there may be a further issue of whether the gain from the assignment of contract is capital gain (50% taxable) or business income (100% taxable).
- Whether the buyer has complied with the withholding requirements in respect of an acquisition of real property from a non-resident. If no clearance certificate has been obtained pursuant to section 116 of the Income Tax Act, the buyer may be liable for 25% of the purchase price that should have been withheld and remitted to the CRA.
- Whether GST has been collected and remitted on the sale of new or substantially renovated housing. If a builder has leased or moved into to a new or substantially renovated home, the builder may be liable to pay GST on the fair market value of the home, including the land value.
- In addition to tax issues that directly apply to real property transactions, the focus of an audit might also turn to a taxpayer’s worldwide income. In those cases, the CRA might look into whether the taxpayer’s lifestyle is being funded by unreported income from a foreign source.
Where a taxpayer has knowingly or under circumstances amounting to gross negligence made a false statement or omission in reporting of tax, the penalty will generally be 50% of the underreported amount of income tax and 25% of the underreported amount of GST.