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The CRA is already challenging real estate transactions ahead of new anti-flipping rules

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Canada’s new anti-flipping rules for residential real estate are scheduled to come into force on Jan. 1, 2023, and are designed to “reduce speculative demand in the market place and help to cool excessive price growth.”

The new tax law will disallow the use of the principal residence exemption to shelter the capital gain realized on the sale of your home if you’ve owned it for less than 12 months, allowing for certain exceptions such as death, disability, separation and work relocation. Instead, the gain will be 100 per cent taxable as business income.

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But the Canada Revenue Agency isn’t waiting around for this new legislation to come into force. It’s currently challenging perceived real estate “flips” through the court system, with mixed results, depending on the facts of the case.

The most recent example involved a Toronto homeowner who went to Tax Court to challenge the CRA’s denial of her principal residence claim.

The taxpayer was reassessed by the CRA for her 2011, 2015 and 2016 taxation years in connection with the sale of four properties she owned at various times during that period. But it was the 2011 sale of her Toronto property that was most contentious, because the CRA assessed the taxpayer beyond the normal three-year reassessment period and imposed a gross negligence penalty for that year.

In court, the taxpayer explained she experienced “tumultuous relations” with her now ex-husband from 2010 through 2014. She said this resulted in an off-again/on-again cohabitation, culminating in a final separation and divorce in 2015. The taxpayer testified that during 2010 and 2011, she was frequently at the house in question “as a refuge from the acrimonious and abusive relationship with her now ex-husband.” She argued this house was her principal residence, so it should have been exempt from capital gains tax when she sold it in 2011.

The CRA disagreed, maintaining the property was acquired and disposed of as “an adventure in the nature of trade” and so its sale should be classified as 100 per cent taxable business income. It argued the taxpayer never changed her primary address, employer T4 address or other mailing addresses to this property, so its position was that she “flipped” the property after completely reconstructing it, in a relatively short period of time, for a large profit.

The Tax Court was ultimately tasked with deciding four basic questions with respect to the 2011 disposition of the home.

Should the sale be properly classified as an adventure in the nature of trade and, therefore, taxable as business income or as capital property, thereby affording it capital gains treatment? If it was capital property, was it the taxpayer’s principal residence, thus allowing the gain to be tax free? Was there sufficient misrepresentation on the taxpayer’s 2011 tax return (that is, the non-reporting of the property’s sale) to even allow the CRA to reopen the 2011 tax year, which would have otherwise been statute-barred and beyond the normal three-year reassessment period? And, finally, was the taxpayer grossly negligent in filing her 2011 tax return and thus subject to a gross negligence penalty?

After analyzing the facts and circumstances of the case, the judge concluded the taxpayer “hardly fits the factual mould of usual ‘flippers’ of real properties.” She was a teacher, not a real estate agent, and she had other circumstances that explained the “less-than-measured tenure of ownership,” namely her abusive, on-again/off-again marriage that she was trying to leave physically and legally.

“This was not a late-breaking story,” the judge noted. “It figured prominently in the file during CRA’s audit and file notes and it explained away her literal ‘comings’ and ‘goings.’”

Ultimately, the judge found that the nature of the property, length of ownership, the taxpayer’s limited frequency of real estate endeavours up to that point, work expended, motive and, most importantly, circumstances dictating the property’s sale all led to the conclusion that the property was acquired as a capital property, rather than to flip it.

Once the judge determined the home was capital property, the next question was whether it could be considered her principal residence at the time, and thus exempt from tax upon sale. The judge noted the property was never occupied with any regularity and there were “no identifiable changes of address, permanent hallmarks or other domestic expenses and touches, beyond mandatory utilities.”

The judge, in ruling the gain was taxable because it was not her principal residence, concluded that “while she may retrospectively believe (the property) to have been her permanent domicile, her present belief cannot assuage the (CRA’s) assumptions without some additional evidence.”

The judge then turned to the question as to whether there was a misrepresentation on her 2011 return owing to “neglect, carelessness or wilful default” in not reporting the sale of the home. The judge found the taxpayer lacked any “details and material to show reasonably that she may have been correct” in her filing position, so the CRA was within its right to reopen and reassess the 2011 tax year, even beyond the normal reassessment period.

Finally, the judge turned to the issue of gross negligence, and concluded the taxpayer should not be held to be grossly negligent in adopting her filing position that the home was her principal residence so she believed the gain need not be reported on her 2011 return.

He cancelled the gross negligence penalties, noting “(the taxpayer), while educated, is clearly unfamiliar with the ways of business and tax. Her belief she could navigate the tax laws because it related to personally held real property was ill-founded. However, based on all the facts, it was not tantamount to a deliberate act, refined to indifference of compliance with the law.”

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com

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How Sellers Should Approach The Current Vancouver Real Estate Market – Storeys

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STOREYS Custom Studio

We often hear “buyer beware,” but when it comes to the up-and-down real estate market, sellers would be wise to do the same — but not too much.

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Is this a good time to sell? Should I even be thinking about selling? These are questions people often have difficulty answering with confidence. But Kevin O’Toole, Vancouver-based Managing Broker at Sotheby’s International Realty Canada, sees the solutions simply.

“If you’re selling out of fear [of a market downturn], that’s not a good play,” O’Toole says. “Take a breath. Talk to your financial advisors. Talk to your realtor.”

O’Toole — who has 15 years of experiencing in the Vancouver real estate market — says if you want to sell because you need more space, or you want to downsize, or you’re being transferred for work and need to move, then go ahead and do it, because there is a decent chance you’ll be dealing with the same market influences in the future that you’re worried about now.

When O’Toole is faced with a client who has this kind of conundrum, he says he always makes a genuine effort to listen. He asks them personal questions, such as “What do you want to achieve?” and “What are your concerns?” or “What do you think would be a better investment?”

Once clients answer, O’Toole says he will often say “tell me more.” He jokingly says it makes him feel like a psychologist, but also says that he genuinely views himself — and other realtors — not as salespeople, but as consultants. And it’s times like those we’re in today when, he says, realtors provide the most value. “Realtors deliver value when there is uncertainty,” he says.

Realtors are not biased towards buying or selling, he adds. So if after the heart-to-heart, an agent feels like selling would indeed help you achieve your goals, they’ll tell you. And if they think it’s in your best interest not to, they’ll probably tell you that as well.

RELATED: Amidst Uncertainty, Vancouver Island’s Market Remains a Beacon of Stability

Once you’ve reached the point where you’ve decided to sell, O’Toole says it’s important to again work with your realtor to set a reasonable asking price. He says in the past month or so, he’s starting to see both sellers and buyers are getting a better idea of where the market is after a series of interest rate increases, and are often coming together to work out a deal.

“For a while, sellers wanted the price that they saw in the early-spring, but are now more amenable to prices for buyers,” he says.

Looking forward, he recognizes there are a few unknowns that could potentially impact the market. Premier David Eby recently announced changes to the Province’s Strata Property Act that would allow stratas to be rented out in all strata buildings. O’Toole says that could impact the market because it could open up another possible solution for those who are selling primarily due to financial concerns.

“There can be a ton of valid, and right, reasons to sell,” O’Toole says. “But selling out of fear is one of the wrong ones.”


This article was produced in partnership with STOREYS Custom Studio.

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Content by STOREYS Custom Studio is created in partnership with companies and brands looking to tell their own stor(e)y.

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Ontario's real estate industry regulator is ineffective, Auditor-General says – The Globe and Mail

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Ontario Auditor-General Bonnie Lysyk speaks during a news conference at Queen’s Park in Toronto on Dec. 4, 2019.Aaron Vincent Elkaim/The Canadian Press

Ontario’s Auditor-General says the province’s real estate regulator has been ineffective in policing the multibillion-dollar residential property industry.

In a report released on Wednesday, Auditor-General Bonnie Lysyk found the Real Estate Council of Ontario (RECO) does not adequately ensure that the industry complies with the regulations and has failed to do enough to protect consumers.

Topping the Auditor-General’s list of concerns was the fact that RECO does not fully inspect real estate brokerages on a timely basis. The Auditor-General found that 27 per cent of registered brokerages have never been fully inspected.

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As well, the Auditor-General said RECO does not have a consistent process to assess those applying to be realtors and who say they have a criminal history. The report looked at a sampling of 25 professionals who had disclosed a criminal conviction or charge and found that RECO had approved 20 of them and did not provide any documented reasoning for why it did so.

RECO was also criticized for how it deals with ethics violations in real estate transactions. The report said the average fine imposed on realtors was often below the amount of the commission they earned in a transaction, and said the fine could be viewed as a cost of doing business instead of a “sufficient deterrent to future misconduct.”

RECO said it is committed to developing a plan that will address the Auditor-General’s concerns. RECO’s response was included in the Auditor-General’s 51-page report. Under the province’s real estate act, every real estate brokerage, broker and realtor must be registered with RECO.

The Auditor-General identified a host of other shortcomings ranging from RECO’s failure to track and analyze complaints, which would help it identify and address systemic problems, to a lack of protocols to ensure that students do not cheat on virtual real estate exams.

The report said one glaring lack of enforcement occurs after RECO inspectors discover a brokerage is violating rules. The regulator rarely follows up “to confirm that the brokerage has addressed the violations,” the report said.

The report also noted that RECO does not have a process to inspect whether real estate professionals are complying with anti-money-laundering laws.

“It is probable that money laundering is occurring undetected in Ontario’s real estate market,” Ms. Lysyk said in a press release accompanying the report.

During the pandemic real estate boom, blind bidding was heavily criticized for contributing to the spike in home prices when properties sold for hundreds of thousands of dollars over the listed price.Lars Hagberg/The Canadian Press

Realtors and brokers are required to report suspicious and large cash transactions to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), which monitors money laundering.

But over the past five years, when more than one million Ontario properties worth $760-billion were sold, hardly any transactions were reported to FINTRAC. The federal agency received no reports of large cash transactions from 2017 to 2020. Only last year, which was a record period for home sales, FINTRAC received 18 reports of large cash transactions, according to the Auditor-General.

The report recommended that RECO work with FINTRAC to share information. It also recommended that RECO update its procedures to ensure that brokerages’ reporting obligations are properly reviewed.

RECO said it had already begun to “explore opportunities” to share information and collaborate with FINTRAC.

Over all, the Auditor-General had 25 recommendations for RECO and the Ministry of Public and Business Service Delivery, which oversees the regulator. In the report, both RECO and the ministry said some of the recommendations would be addressed next year when the province’s new real estate rules go into effect.

That law includes a purported change to an opaque real estate sales tactic known as blind bidding, where competing buyers in a multiple-bid situation do not know what others are offering to pay for a home.

During the pandemic real estate boom, blind bidding was heavily criticized for contributing to the spike in home prices when properties sold for hundreds of thousands of dollars over the listed price.

The real estate industry has repeatedly defended the practice as giving homeowners choice. The new law, which comes into effect in April, includes a provision that will allow the homeowner to disclose the competing offers. However, homeowners are already allowed to sell their homes via an open auction.

The Auditor-General report recommended that RECO work with its overseeing ministry to gather data on which sellers choose an auction process.

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Real estate industry braces for foreign buyer ban

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Ottawa’s two-year foreign buyer ban applies to corporations and individuals who are not citizens or permanent residents of Canada and includes direct and indirect purchases of homes in the country.Graeme Roy/The Canadian Press

With financial markets roiling and house prices tumbling, investors in countries around the globe appear to have a diminished zeal for buying real estate outside of their own borders.

Even so, Canadian real estate mavens are brushing up on the temporary foreign buyers’ ban, which is set to come into effect on Jan. 1.

John Zinati, lawyer with Zinati Kay Barristers and Solicitors, warns that fines of up to $10,000 may be coming to any industry player working with a foreign buyer.

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“We’re going to be the ones subject to the fine,” says Mr. Zinati, including lawyers in that cohort – along with agents, brokers and developers.

Parliament passed the Prohibition on the Purchase of Residential Property by Non-Canadians Act earlier this year after the Trudeau government unveiled the plan in the 2022 federal budget.

The two-year ban applies to foreign corporations and individuals who are not citizens or permanent residents of Canada and includes direct and indirect purchases.

Mr. Zinati says many details are still unclear but the information provided so far suggests that people who knowingly assist in a contravention of the law may be subject to monetary penalties on conviction.

“For every transaction after January 1, we’re going to be asking for proof” of Canadian citizenship or permanent resident status,” Mr. Zinati says of his firm.

The rules allow some exemptions, Mr. Zinati adds. Refugees, students and an individual purchasing with a spouse or common-law partner who is not subject to the ban may be eligible, for example.

Buildings with more than three units are not covered by the ban.

One aspect Mr. Zinati is keenly watching for is more information on how the rules will be enforced and whether the final regulations will be less stringent than the government’s original stance appeared to be.

“On the face of it, we could be subject to a fine, which is pretty aggressive,” he says.

Mr. Zinati points out that the Federation of Ontario Law Associations has raised concerns with the legislation. Some lawyers also believe the law may be challenged on the grounds that property rights fall under provincial government jurisdiction.

Interestingly, a sales agreement signed in violation of the law won’t be invalid, explains Mr. Zinati. The seller and the buyer would still be required to stick to the contract.

After that, the federal government would have the task of asking a court in the province where the property is located to order the property sold. The foreign buyer would not be allowed to profit from that sale.

Mr. Zinati says the process of enforcement would be so onerous, he wonders if the act will mostly serve as a deterrent.

“They may be relying on people in the industry to be afraid to do deals with foreign buyers.”

Mr. Zinati adds that the regulations will not apply to agreements signed in the remaining weeks of 2022, even if the deal closes in 2023.

Mr. Zinati says purchases by foreign buyers who have no ties to this country are rare. Looking at his own firm, lawyers are aware of the occasions when they need to remit Ontario’s foreign buyers’ tax on behalf of a buyer.

“That is not a very common instance.”

Mr. Zinati also believes the new ban will have little impact because the market has fallen since the spring when the budget was announced.

“This came about when the market was hot,” he says. “We have the not uncommon phenomenon – trying to calm a market that by all accounts is calming on its own.”

Mr. Zinati adds that the Ontario government recently raised the province’s foreign buyers’ tax to 25 per cent from 20 per cent.

Clients have been calling to ask him why the tax is being raised if purchases by foreign buyers are banned. The two levels of government are not working in tandem, he points out.

The City of Toronto also plans to implement a vacant homes tax. The annual tax will be levied on unoccupied homes beginning in 2023.

All residential property owners will be required to submit a declaration of their property’s occupancy status for the previous year.

For its part, the Canadian Real Estate Association (CREA) says the experience in British Columbia, which introduced a foreign buyers’ tax in 2016 and a speculation and vacancy tax in 2018, suggests that such measures have a small and temporary effect on real estate markets, housing availability and affordability.

The effects are largely isolated to large, metropolitan markets, with no statistically significant impact in smaller communities, according to CREA.

CREA made several recommendations, including a suggestion that the ban include an exemption for buyers from the United States and Mexico in order to avoid a reciprocal response from Canada’s trading partners.

The association is also watching for clarifications and definitions in the regulations when they are released. The legislation may be complicated, CREA cautions, so it is advising members to consult a lawyer for guidance and advice.

Simson Chu, real estate agent with Chestnut Park Real Estate Ltd., has not seen any signs of a rush to buy from overseas investors before the ban comes into effect on Jan. 1.

Mr. Chu adds that the ban is aimed at buyers who have no connection to Canada, and very few buyers land in that category.

Mr. Chu keeps an eye on the global real estate market, and he sees the slowdown permeating many economies as buyers wait for deals and further declines in prices.

At Capital Economics, chief global economist Jennifer McKeow, is forecasting widespread recessions next year, including shallow dips for Canada and the United States.

The economist notes that several countries are facing headwinds from tighter money policy and a move by banks to tighten their lending criteria.

“One consequence of this is that housing activity, which has already weakened, is set to deteriorate further and we anticipate declines in house prices across several major advanced economies,” Ms. McKeown says in a note to clients.

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