Real Estate Tax Lawyers in Toronto
Buying, selling, developing, or investing in real estate? Our tax lawyers advise on Canadian real estate tax matters, CRA disputes, GST/HST and property transactions.
Dealing With a Real Estate Tax Issue?
Real estate transactions can create significant Canadian income tax and GST/HST consequences for homeowners, investors, landlords, developers, builders, corporations, and non-residents.
The tax treatment of a property transaction depends on factors such as the taxpayer’s intention, the nature and use of the property, the length of ownership, the frequency of similar transactions, and whether the property was acquired primarily for investment, rental, development, or resale.
At KR Law Firm, our tax lawyers advise individuals and businesses on real estate tax matters and represent taxpayers in disputes with the Canada Revenue Agency (CRA). We assist with principal residence issues, capital gains and business-income characterization, property flipping, rental properties, GST/HST, assignment sales, non-resident transactions, CRA audits, objections, and Tax Court appeals.
How Is the Sale of Real Estate Taxed in Canada?
The tax treatment of a real estate sale depends on the facts and circumstances.
A gain may be treated as:
- Tax-exempt under the Principal Residence Exemption: where the statutory requirements are met;
- A capital gain: where the property was held as capital property or an investment; or
- Business income: where the property was acquired or held as part of a business or an adventure or concern in the nature of trade.
The distinction between a capital gain and business income can have a significant effect on the amount of tax payable.
The CRA considers factors such as the taxpayer’s intention when acquiring the property, the period of ownership, the taxpayer’s history of similar transactions, improvements or development work, the reason for the sale, and other surrounding circumstances.
Capital Gain vs. Business Income on Real Estate
One of the most common real estate tax disputes involves whether a profit from the sale of property should be treated as a capital gain or fully included as business income.
A property may be more likely to be treated as capital property where it was acquired and held as a long-term investment or to produce rental income.
By contrast, a gain may be treated as business income where the taxpayer acquired the property with the primary or secondary intention of reselling it for profit.
Relevant factors may include:
- The taxpayer’s intention when the property was acquired;
- The length of time the property was owned;
- The number and frequency of similar transactions;
- The taxpayer’s occupation or business activities;
- Renovation, development, or improvement work;
- The circumstances leading to the sale;
- The financing structure;
- Whether the property generated rental or other income; and
- The taxpayer’s overall course of conduct.
The CRA may audit real estate transactions where it believes a gain reported as a capital gain should instead have been reported as business income.
Canada’s Residential Property Flipping Rule
Special rules apply to certain residential properties sold shortly after acquisition.
For dispositions occurring after 2022, a gain from the disposition of a housing unit in Canada, or a right to acquire a housing unit in Canada, that was owned or held for less than 365 consecutive days is generally deemed to be business income.
This means the gain is generally fully included in income rather than treated as a capital gain.
The rule can also prevent the gain from being sheltered by the Principal Residence Exemption.
Specific statutory exceptions may apply where the disposition occurs because of, or in anticipation of, certain life events.
Examples can include circumstances involving:
- Death;
- Household changes;
- Marriage or relationship breakdown;
- Serious illness or disability;
- Employment relocation;
- Insolvency;
- Personal safety concerns;
- Destruction or expropriation of the property; or
- Other qualifying events identified in the legislation.
Even where a property was owned for more than 365 days, the CRA may still determine that the profit is business income based on the ordinary tax-law principles governing real estate transactions.
Principal Residence Exemption
A taxpayer who sells a home may be entitled to shelter some or all of the capital gain using the Principal Residence Exemption.
To qualify, the property must satisfy the statutory requirements and be properly designated as the taxpayer’s principal residence for the relevant years.
Since 2016, a disposition of a principal residence must generally be reported on the taxpayer’s income tax return in order to claim the exemption.
Depending on the circumstances, issues may arise where:
- The property was not the taxpayer’s principal residence for every year of ownership;
- The taxpayer owned more than one property;
- The property was partly rented;
- The property was converted from personal use to income-producing use;
- The taxpayer was a non-resident during part of the ownership period;
- The designation was filed late;
- The CRA alleges that the property was acquired primarily for resale; or
- The flipped-property rules apply.
Change in Use of a Principal Residence or Rental Property
Tax consequences can arise when a property changes from personal use to income-producing use or from income-producing use to personal use.
A change in use can trigger a deemed disposition for income tax purposes even though the property has not actually been sold.
In certain circumstances, elections under the Income Tax Act may defer the immediate tax consequences of the change in use.
Whether an election is available and advisable depends on the taxpayer’s facts, the use of the property, and the taxpayer’s broader tax position.
Rental Property Tax Matters
Owners of rental properties must generally report rental income and may be entitled to deduct eligible expenses incurred to earn that income.
Real estate tax issues involving rental properties may include:
- Reporting rental income;
- Deductibility of repairs and expenses;
- Capital expenditures;
- Capital cost allowance;
- Recapture of capital cost allowance;
- Capital gains on sale;
- Change-of-use rules;
- Short-term rental issues;
- Co-ownership arrangements; and
- CRA audits of rental income and expenses.
A sale of a rental property may result in a capital gain and may also create recapture of previously claimed capital cost allowance, depending on the circumstances.
GST/HST on Real Estate Transactions
GST/HST can apply to many real estate transactions, particularly where the property is newly constructed, substantially renovated, commercial, or connected with a business activity.
Potential GST/HST issues may arise in relation to:
- New residential construction;
- Substantially renovated homes;
- Commercial properties;
- Vacant land;
- Property development;
- Assignment sales;
- Input tax credits;
- New housing rebates;
- Rental properties; and
- Property flipping or resale activities.
The income tax treatment of a transaction and its GST/HST treatment are separate issues and should both be considered.
Assignment Sales and Pre-Construction Properties
An assignment sale occurs where a purchaser transfers rights under an agreement to purchase a property before completing the original transaction.
Assignment transactions can create both income tax and GST/HST consequences.
Depending on the facts, the profit from an assignment may be treated as business income rather than a capital gain.
The residential property flipping rules can also apply to a right to acquire a housing unit held for less than 365 consecutive days, subject to statutory exceptions.
GST/HST may also apply to assignment consideration depending on the transaction and applicable legislation.
Real Estate Development and Property Flipping
Property developers, builders, renovators, and taxpayers who regularly purchase and resell properties can face particular scrutiny from the CRA.
Profits from properties acquired for the purpose of resale are generally treated as business income.
This can apply to:
- Homes purchased, renovated, and resold;
- Vacant land acquired for development;
- Properties demolished and rebuilt for resale;
- Pre-construction units acquired for assignment or resale;
- Repeated residential property transactions; and
- Other transactions undertaken with a profit-making intention.
Living in a property for a period of time does not necessarily establish entitlement to the Principal Residence Exemption if the property was acquired primarily for resale.
Real Estate Transactions Involving Non-Residents
Canadian real estate transactions involving non-residents can create additional tax and withholding obligations.
When a non-resident disposes of certain taxable Canadian property, special rules may require the purchaser to withhold part of the purchase price unless the appropriate CRA certificate or other relief is obtained.
Issues can also arise concerning:
- Section 116 certificates of compliance;
- Purchaser withholding obligations;
- Non-resident rental income;
- Canadian income tax returns;
- Capital gains;
- GST/HST;
- Tax residency status; and
- Cross-border ownership structures.
CRA Real Estate Audits
Real estate remains an area of active CRA compliance activity.
A real estate audit may examine:
- Unreported property sales;
- Capital gain versus business-income treatment;
- Principal Residence Exemption claims;
- Property flipping;
- Assignment sales;
- Rental income;
- GST/HST;
- Input tax credits and rebates;
- Construction and renovation activities;
- Foreign ownership or non-resident issues; and
- Other property-related tax reporting.
If you are currently under audit, learn more about our CRA audit representation.
CRA Reassessments Involving Real Estate
A CRA audit or review may result in a Notice of Reassessment changing the tax treatment of a property transaction.
For example, the CRA may reassess a taxpayer by:
- Recharacterizing a capital gain as business income;
- Denying or reducing a Principal Residence Exemption claim;
- Applying the residential property flipping rules;
- Assessing unreported rental income;
- Denying expenses or deductions;
- Assessing GST/HST;
- Denying input tax credits or rebates;
- Assessing penalties or interest; or
- Changing another aspect of the reported transaction.
If you disagree with a CRA assessment or reassessment, the appropriate next step may be a Notice of Objection.
Learn more about our CRA tax objection services.
Tax Court Appeals Involving Real Estate
Where a real estate tax dispute is not resolved through the CRA objection process, the matter may proceed to the Tax Court of Canada.
Real estate tax litigation may involve factual disputes about the taxpayer’s intention, documentary evidence concerning the acquisition and sale, financing records, renovations, rental history, witnesses, and the application of Canadian tax law.
Learn more about our Tax Court appeal representation.
How Our Tax Lawyers Assist With Real Estate Tax Matters
1. Review the Transaction and Tax Position
We review the property transaction, ownership history, agreements, tax filings, accounting records, CRA correspondence, and other relevant documentation.
2. Assess the Applicable Tax Treatment
We analyze issues such as capital gain versus business income, Principal Residence Exemption eligibility, GST/HST, rental income, change of use, and other applicable tax rules.
3. Advise Before or After a Transaction
Where appropriate, we can advise on the Canadian tax implications of a proposed acquisition, sale, development, ownership structure, or other real estate transaction.
4. Represent Clients During CRA Audits
If the CRA reviews a real estate transaction, we can assist with information requests, supporting documents, legal submissions, and proposed adjustments.
5. Challenge CRA Reassessments
Where the CRA reassesses a real estate transaction, we can assess the reassessment and represent the taxpayer through the objection process.
6. Represent Clients in Tax Court
If the dispute proceeds beyond CRA Appeals, our tax lawyers can represent clients before the Tax Court of Canada.
Why Work With KR Law Firm on a Real Estate Tax Matter?
Real estate tax matters often involve significant amounts, detailed factual records, and overlapping income tax and GST/HST rules.
- Tax-Focused Legal Representation: Our practice focuses on Canadian tax matters and disputes involving the CRA.
- Transaction and Dispute Experience: We consider both the underlying tax treatment and potential CRA dispute implications.
- Real Estate Tax Analysis: We address issues such as capital gains, business income, Principal Residence Exemption, GST/HST, and property flipping.
- Direct CRA Representation: Once authorized, we can communicate with the CRA during audits, objections, and other tax proceedings.
- Tax Litigation Representation: Where appropriate, we can continue representing clients if a real estate tax dispute proceeds to the Tax Court.
Frequently Asked Questions About Real Estate Tax in Canada
Is profit from selling real estate a capital gain or business income?
It depends on the facts. A property held as a long-term investment may produce a capital gain, while property acquired primarily for resale may generate business income. The CRA considers factors such as intention, length of ownership, transaction history, improvements, and the reason for sale.
What is the 365-day property flipping rule?
For dispositions after 2022, a gain on certain Canadian residential properties or rights to acquire residential property held for less than 365 consecutive days is generally deemed to be business income unless a statutory exception applies.
Can I claim the Principal Residence Exemption if I sell my home?
Potentially. The property must meet the statutory requirements and be properly reported and designated. Issues can arise if the property was rented, owned with another property, held for resale, or subject to the flipped-property rules.
Do I have to report the sale of my principal residence?
Yes. The sale of a principal residence must generally be reported on the taxpayer’s income tax return, even where the gain is fully sheltered by the Principal Residence Exemption.
Is rental income taxable?
Yes. Rental income is generally taxable and must be reported. Eligible expenses incurred to earn that income may be deductible subject to the applicable rules.
Is GST/HST payable when selling real estate?
It depends on the type of property and transaction. GST/HST commonly arises with new or substantially renovated residential properties, commercial real estate, development activities, assignment sales, and other business-related transactions.
Are assignment sales taxable?
Yes. Assignment profits can create income tax consequences and may also be subject to GST/HST. The proper tax treatment depends on the circumstances.
Can the CRA deny my Principal Residence Exemption?
Yes. The CRA may reassess a claim if it believes the statutory requirements were not met, the property was acquired primarily for resale, the disposition was not properly reported, or another issue affects eligibility.
What happens if the CRA treats my capital gain as business income?
The CRA may issue a reassessment increasing taxable income. If you disagree with the reassessment, you may have the right to file a Notice of Objection and, if necessary, appeal to the Tax Court of Canada.
Can the CRA audit a property sale years later?
Yes. Real estate dispositions are subject to CRA audit and reassessment rules. In some circumstances, failure to report a real estate disposition can extend the period during which the CRA may reassess amounts reasonably related to that disposition.
Speak With a Real Estate Tax Lawyer
If you are buying, selling, developing, renting, or investing in real estate and have questions about the Canadian tax consequences, KR Law Firm can review your situation and advise you on the available options.
We also represent taxpayers dealing with CRA audits and reassessments involving property sales, Principal Residence Exemption claims, property flipping, rental income, GST/HST, assignment sales, and other real estate tax matters.
Contact KR Law Firm to Book a Free Consultation with one of our tax lawyers.