CRA clampdown highlights broker value-add

CRA clampdown highlights broker value-add

CRA clampdown highlights broker value-add

 

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.
11 Comments
  • SLev 2013-04-16 9:32:05 AM
    didnt the Canada Supreme Court restrict the "Reasonable expectation of profit" test in 2002?
    Post a reply
  • Debbie 2013-04-16 10:07:05 AM
    Calum Ross stick to brokering..........really!
    Post a reply
  • Tomas 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?
    Post a reply