Canadians who buy, renovate and sell homes quickly use the principal residence gain tax exemption to enhance their profits - but there may be limits.
An interesting case from the Tax Court of Canada last fall explores the issue of how many times a taxpayer can flip personal residences during a short period of time before the government will tax the profits as income rather than tax-free capital gains.
Rick Hansen, a builder, and his spouse Tania Weiland sold five houses in the Ottawa area over six years between 2007 and 2012. Their total profit from the sales came to almost $1 million, and the minister of National Revenue reassessed Hansen for the total amount on the basis that it was business income.
Under Canadian law, any profit from the sale of a principal residence is tax-free. When filing his tax returns, Hansen took the position, with advice from his accountant, that the profits were exempt from tax.
In addition to the taxes, Hansen was also assessed penalties for not declaring the income.
Hansen appealed the assessment at a Tax Court of Canada hearing in June 2019. The court took 14 months to release its decision in September, 2020.
Hansen successfully argued that reassessments for 2007, 2008 and 2009 were barred by law since too much time had elapsed. Typically, Canada Revenue Agency (CRA) has three years from issuing a Notice of Assessment to a taxpayer to reassess the tax returns, but the time limit is extended if the government can prove a careless mistake or misrepresentation.
Since Hansen had consulted his accountant when filing his returns for 2007, 2008 and 2009, the court found there was no careless mistake or misrepresentation. Hansen and his family had actually lived in the three houses sold in 2007, 2008 and 2009, and the court ruled that he was entitled to the principal residence exemption.
In 2011 and 2012, Hansen and his wife bought and sold two more houses. The final house was sold in 2012 when construction of their current house was completed.
The Tax Court ruled that Hansen dealt with the fourth and fifth houses in a “business-like way,” since the couple planned to move to house six when construction was completed.
As a result, the profits from those houses was held to be income, but since Hansen’s wife was a co-owner, he was assessed on half of the net proceeds.
In reading the case, it appears that Canada Revenue took an aggressive approach, including assessing Hansen with his wife’s share of the profits, and calling the couple’s neighbours at trial in an attempt to discredit their testimony.
Writing about this case in The Lawyer’s Daily recently, tax lawyer Anna Malazhavaya summarizes four takeaways:
1. CRA cannot reassess taxpayers beyond the three-year limitation period if their filing position was reasonable and based on professional advice.
2. It seems that receiving incorrect professional advice is better than receiving no advice at all.
3. CRA can be very resourceful in efforts to verify evidence. “So, never lie to the CRA,” Malazhavaya says,
4. Consult a good tax professional.
To this advice, I would add the caution that taxpayers who serially buy and sell homes, taking untaxed profits to move on to the next house, will eventually come under the scrutiny of the CRA.