Written on behalf of Feigenbaum Consulting
As a law firm assisting clients in both the United States and Canada, we have many clients who own property in each country and may sell their property for profit or continue to maintain personal homes on both sides of the border. It’s not uncommon for Canadians to move to the United States (and vice versa) for short or long timeframes. When doing so, that person might decide to sell their property in Canada. Depending on how long a home has been lived in, there can be significant tax considerations to consider when making the sale. A recent decision from the Tax Court of Canada shows how one taxpayer had to go to great lengths to demonstrate she had not bought her condo with the intention to sell it for a profit in the short term.
Taxpayer sold home less than a year after taking possession
The matter before the court was an appeal from the taxpayer against an assessment issued to her by the Canada Revenue Agency (“the CRA”). It all started when the appellant signed an agreement of purchase and sale on November 13, 2007, for a townhouse located in Markham, Ontario. She purchased the property for $413,080.
The appellant stated she intended to use the home as her residence and took possession of it following its construction on May 19, 2011. The previous December, she had met and started a relationship with a man who is now her husband. He is a citizen of the United States. At the time the home was ready to be moved into, she was not prepared to give it up, though she did decide to move to the United States to live with her husband in early 2012. Because of this decision, she sold her property on June 29, 2012, for $478,000, netting her a profit of just over $40,000.
Taxpayer audited following sale of home
The CRA reassessed the appellant’s taxes payable in 2015 following an audit. The audit determined that the sale of the home had resulted in a business income of $43,041. The reassessment resulted in her owing $22,160.98 in taxes on that extra income. While she initially objected to the reassessment, it was confirmed in February 2017. She did not appeal at that time and paid the money owed in full while still living in the United States.
In what the court described as “a kind of ironic thanks,” the CRA imposed a GST/HST account on the appellant, deeming her a “builder” under the Excise Tax Act “The Act”). As a builder, she was not only liable for income tax on the profits she made from the sale of the house but also HST from the sale. The CRA sought $54,991 as well as interest of $20,036 and penalties of $2,199.64. The appellant claimed she is not a builder and should not be responsible for paying HST.
The law around income from “flipping” houses
The court began its analysis by looking at how the Excise Act defines a builder. In short, it states that a builder of a residential complex is someone who acquires an interest in a property before it is registered as a condo, or before it has been occupied as a place of residence or lodging with the primary purpose of selling it or leasing it as part of a business venture. It does not apply to people who construct, hire someone to construct, or live in the property for reasons other than business or trade.
When deciding whether someone has acquired or sold property as a business venture, there are several factors to consider. These factors, which the Supreme Court of Canada established in 1986, include:
- The nature of the property sold
- The length of period of ownership
- The frequency or number of other similar transactions by the taxpayer
- Work expended on or in connection with the property realized
- The circumstances that were responsible for the sale of the property
The appellant’s position was that she intended to live in the property, occupied it before moving for personal reasons, and did not carry out business from it. However, the CRA’s position was that the condo was the type of property that can be easily flipped for profit and that her motive at the outset was to sell it for profit.
Court found no evidence appellant intended to flip home for profit
The court applied the Supreme Court of Canada’s factors to the appellant’s situation. The court did not give any weight to the CRA’s argument that the townhouse was the type of property that is easy to flip for profit, stating the type of property is not determinative about intent. While the appellant did live in it only for a short period, she moved only because she had fallen in love and eventually married a person living in the United States.
The court noted that while the move happened after the appellant lived in the home for less than a year, she had signed the purchase agreement three years earlier. The appellant also had no apparent business related to selling property and did not have a business plan or anything else to indicate she had purchased the home with the intent to sell it for profit after such a short time.
Considering these factors, the court ruled in favour of the appellant and found she had “credible and logical” reasons for acquiring the property and selling it.
Contact Feigenbaum Law to reduce your tax burden in the United States and Canada
The tax team at Feigenbaum Law offers a full suite of tax services, including cross-border issues. We help clients in the United States and Canada shield themselves and their businesses from the liabilities and pitfalls associated with complex tax scenarios. Contact us online or by phone at 877-275-4792 to see how we can help resolve your tax situation or make your cross-border transition as smooth as possible.