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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

March 31, 2017 | Gaming It

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

“So,” Geoff said, “I see you sold a house last year. Now you need to disclose all of the details to me.” Yes, he’s my accountant, and in this cruelest month of the year, his task is to do my taxes then deliver the bad news. I am blessed with a big income. And cursed at what it costs. More than half of what comes in goes back out to government. With the rest I buy bulk ice cream and drywall.

This is the first year ever that Canadians will have to disclose the intimate details of their residential real estate. Geoff waterboarded me until I revealed the date I bought the last house, how much I paid, when it was sold, the selling price and related costs, like land transfer taxes, commissions and legal fees.

The point of the Principal Residence Exemption (you must fill out the Schedule 3, Capital Gains section of the T1 tax return) when it was first unveiled six months ago was to crack down on foreigners who dump houses and pocket the gains, evading tax. But there is scant evidence of that happening, as much as the deplorables in the steerage section wish it were so. More to the point, the CRA is developing a mother of a data base so it can nuke flippers or anyone else in the business of profiting from residential real estate.

There are three ways houses and taxes mingle. First, you’re allowed to make gains on your home and pay no tax. In order to do so, you must now fill in Schedule 3, disclosing purchase and sale values associated with a specific address. If you do not qualify for the exemption, your profits will be subject to capital gains – such as with a rental condo, tenanted duplex or the old home you hung onto and rented out when you bought a new one. In that case 50% of the profit will be taxed at your personal marginal tax rate.

However, if the CRA thinks you’re in the business of making money from houses, it’s possible you’ll have to include 100% of any profits in your annual taxable income. Ouch. That could happen if you bought a pre-construction condo and sold it upon closing, or a few months later – even if you moved in. It might apply (at the CRA’s discretion) if you bought a house, occupied it during a renovation, then put it on the market. Or if you owned a rented house, kicked the tenant out, stayed there for a while, and sold. Part of your gains might be classified as a capital gain in that instance, and part as income.

The law’s fuzzy, elastic and pliable. There’s no legislated period of time that qualifies a house as a principal residence, and the establishment of this registry is an obvious and clear first step in the war on speculation. Always remember that Ottawa has a giant weapon called GAAR – the General Anti-Avoidance Rule. This gives the CRA the authority to tax in any circumstance where it considers a taxpayer has taken action simply to avoid taxation.

The definition: where a transaction or a series of transactions achieves a reduction, avoidance or deferral of tax, and those transactions or series of transactions are not conducted for any primary purpose other than to obtain a tax benefit, the tax consequences of such may be invalidated.

So, combine the PR exemption registry with the CRA’s taxing of house profits as income and the unlimited power of GAAR, and you have the basis of a serious war on flipping, speculation and anyone who thinks they can game the market. It’s a complete myth that by simply living in a property for a short while it can become a principal residence. Already scores of taxpayers are losing tax court battles in which profits from condos bought in pre-construction are being included in regular taxable income – and the costs associated with them are not even deductible.

This is why governments at other levels are going too far, creating a Big Brother orgy of tax overkill. BC has its foreign buyer tax in Vancouver. That city has imposed an empty houses tax, while Victoria is considering the same. Toronto’s mayor thinks that’s a swell idea to impose on six million people, and Ontario is now contemplating both a foreigner’s tax plus some kind of speculation levy or additional capital gain.

All of this seeks to regulate assets people buy with dollars already taxed as never before. And none of it addresses the root cause of why houses in bubble markets cost so damn much.

Debt’s too cheap and too accessible. Because Canadians have house lust, no discipline and inbred financial illiteracy, they’re seriously at risk. If you think government is overreaching now, just wait.

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March 31st, 2017

Posted In: The Greater Fool

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