CRA clampdown highlights broker value-add

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The recent Canada Revenue Agency interest in people claiming their condos as homes instead of investment properties is long overdue, says one mortgage broker, also suggesting the crackdown illustrates the role brokers can play.
 
“The crackdown by CRA may be painful, but it is in the best interest of a stable housing market and a victory for legitimate real estate investors who play by the rules,” says Calum Ross, a broker with Verico - Mortgage Management Group. “It is surprising that it has taken this long for CRA to catch on to the incorrect treatment of profit taking by speculative condo market investing. Speculative real estate investors and their greedy behaviour unfairly punish legitimate investors via tougher mortgage rules and tax audits.”
 
Finance Minister Jim Flaherty has told the CRA to collect more than $500 million extra from suspected tax cheats this year.
 
Auditors are reported to have applied a rare 50 per cent penalty for “gross negligence,” even on those who had never owned a condo previously.
 
“Successful long-term real estate investors buy for cash flow and positive cash-flowing properties rarely get people to get into financial trouble. The fact that any of these people are surprised by having their capital gains exemption disallowed speaks to just how dangerous a little knowledge can be,” Ross told MortgageBrokerNews.ca. “One of the key benefits of real estate investments is the preferential tax treatment they can receive when structured properly – the after-tax position of investments is perhaps the single most important factor for higher income professionals.”
 
Real estate sales are currently broken down into three tiers of taxation — no tax on a principal residence; tax on half a gain from selling a recreational, rental or other investment property; and full taxation for making a business of buying and selling (flipping property). The CRA is focusing on the recent Toronto condo boom as it has “discovered non-reporting of taxable income – builder GST/HST housing rebates and capital gains/income in sales of real property,” one agency spokesman told the Toronto Star.
 
Ross cites the example of one married woman who decided her new condo was too cramped after living in it for only 15 days, and decided instead to resell it and go back to the house she still owned. She claimed the condo as a principle residence in 2011, resulting in the CRA ordering the couple to pay $72,000 of tax and a $36,000 penalty on a $150,000 price gain.
 
“The article in The Toronto Star highlights the same sad story we see time and time again – the people who need the financial advice the most often don’t get it,” says Ross. “I have dozens of clients with net worth in excess of $10 million dollars and they consistently value the advice of my office and all the other advisers on their team. When it comes to financial advice you get what you pay for, but if people think good financial advice is expensive all they have to do is look at this article to see how much not getting the advice costs.”
 
Ross also cautions that the crackdown on apparent condo flipping may be just the tip of the iceberg.
“Wait until the CRA starts cracking down on the negative cash-flowing properties. CRA guidelines clearly dictate that people borrowing to invest must meet the ‘reasonable expectation of profit’ criteria as set out by CRA and I would suggest that a lot of people renting their negative cash-flow condos will be hard pressed to pass this test,” he says.
  • SLev on 2013-04-16 9:32:05 AM

    didnt the Canada Supreme Court restrict the "Reasonable expectation of profit" test in 2002?

  • Debbie on 2013-04-16 10:07:05 AM

    Calum Ross stick to brokering..........really!

  • Tomas on 2013-04-16 11:35:31 AM

    "One of the key benefits of real estate investments is the preferential tax treatment they can receive when STRUCTURED PROPERLY"

    Calum Ross has a CRA audit proof way to avoid tax? Is he sure it's audit proof?

  • Atefeh on 2013-04-16 11:54:05 AM

    Calum, These auditors don't know what they are doing. IT-120R6 paragraph 5-10 allows individuals to have/claim more than one property as a principal resident. It further explains that Even if a person inhabits a housing unit only for a short period of time in the year, this is sufficient for the housing unit to be considered ordinary inhabited in the year by that person. That is the law.

    From what I saw, individuals small investors are not cheaters, politicians are. Perhaps Mr. Flaherty should look around himself.

  • Ron Butler on 2013-04-16 1:33:06 PM

    I don't think Calum ever suggested that he has an "audit proof" secret. Calum is also highly experienced and educated in this area. Calum does stick to brokering as one of the highest producing individual agents in Canada.

    I think Calum very rightly pointed out that CRA has been on the attack for over a year and many people have been badly burnt with penalties, garnishments and account freezes.
    My lawyers have told me of dozens of incidents of CRA investigations of quick sales of apartment condo units and sales by assignment that had terrible results for sellers.

    A good broker would warn a client that the fast sale of a condo may draw attention and they client should be cautious.

  • Tomas on 2013-04-16 1:39:07 PM

    Ron,

    The article quotes that there is a "proper structure."

    It would be interesting to know how flexible this structure is, and if this structure has successfully hurdled CRA audit.

  • Ron Butler on 2013-04-16 1:47:39 PM

    A "proper structure" could be: declare as a rental and pay the proper taxes on sale. Calum did not mention any magic.

  • Robert Stanfield, Invis on 2013-04-16 2:55:16 PM

    Once again, negative comments posted by people to shallow to include their full name. If you want to take shots at people quoted in the articles posted, have the maturity to put your full name in the response. Kudo's to Ron Butler for posting a positive comment.

  • Calum Ross on 2013-04-16 7:42:57 PM

    If anyone wants some of the rulings on expectation of profit pertaining to real estate investments then I am always happy to share. My education is in finance and not tax - I don't profess to be a tax expert and only accountants and tax lawyers have the liability insurance to properly advise on such matters. I am broker advocate who works hard to elevate the profile of industry - consider this before you make comments that add little or no value and/or sound like sour grapes.

    The quotes in the article are only a part of the story. I won't engage in a typing debate on a matter in a public forum...not to be disrespectful but it is neither useful or effective medium for such things.

    If someone wishes to challenge me on my opinions then I am more than happy to discuss them with a qualified party who has the basis to offer an opinion. I am not interested in engaging in mindless debate with someone who doesn't have the courage (or perhaps competence?) to post something under their real name. I am curious to know why people don't post under their real name, because cyber research indicates it is typically often because they don't really know what they are talking about and/or because the real name won't carry enough credibility with it.

    I have a huge amount of respect for the business that Rob Butler has built and there is no question that Rob is one of Canada's leading authorities on the residential mortgages. Let's work together to keep our comments constructive and useful to the industry at large - the way this was intended to be. I welcome anyone to offer a qualified alternative input on the matter.

    Wishing you all the best - Calum

  • John Dearin on 2013-04-19 11:21:01 AM

    IT 120R6 was cancelled last month and the information contained in it is no longer applicable. Most IT's are replaced by "Income Tax Folio's" which are a much easier read. In particular for those interested view FOLIO S1-F3-C2: Principal Residence. ( http://www.cra-arc.gc.ca/tx/tchncl/ncmtx/fls/s1/f3/s1-f3-c2-eng.html#N10568 ) A quote from this folio:

    More than one residence in a tax year
    2.28 While only one property may be designated as a taxpayer’s principal residence for a particular tax year, the principal residence exemption rules recognize that the taxpayer can have two residences in the same year, that is, where one residence is sold and another acquired in the same year. The effect of the one plus in variable B in the formula in ¶2.20 is to treat both properties as a principal residence in such a year, even though only one of them may be designated as such for that year.

    this is the only time that you will get more than one exemption on a principle residence, even then CRA will only allow one to be designated as such. (ie for rental purposes and maintain principle residence status)

    The folio is an interesting read as most Canadian taxpayers do not know these rules and when they run afoul of the rules, these dirty rotten tax auditors can really beat you up. The best one I saw was an individual that bought five adjacent pieces of land, then as he built a house on one, he moved in, built a second and moved in and so on. CRA caught him in the fourth house, considered him to be involved in a "Adventure or Concern in the Nature of Trade" and assessed HST on the fair market value of each property. All his gains were wiped out before the 90 day appeal period was up. AH the memories.

  • John Dearin on 2013-04-19 11:33:37 AM

    The Expectation of Profit Test" was used by CRA to determine the viability of business's that had substantial losses that were wrote off against other income. In short the CRA auditor got to foretell the future and deny the expenses. SLev is right in that it was shot down completely by the Supreme Court back in 2002. the auditor couldn't show how the Chrystal ball worked (Sarcasm).

    It was replaced by the department of finance by the "Cumulative Expectation of Profit" test in 2005. Finance broadened the scope to include passive income (Rentals, Investments) and even to corporations. In short, take your losses but when you shut down, they look at the cumulative losses and then deny them all, resulting in assessments going back years.

    Anyone interested in this stuff, the CRA website is very well put together. But as Calum says, stick to brokering and refer these issues to a paid professional with a designation, not some yahoo with a shingle saying financial advisor.

    Debbie and Atefeh would do themselves a favor by listening to the likes of Ron and Calum

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