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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

May 18, 2018 | The Big Suck

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.

Steve and Trevor sold me a house a few years back. It was memorable since we did the deal on Canada Day. And those were the gentle days, before governments had become so mean and hungry.

S&T made a business of buying original brick boxes in North Toronto, blowing out the back for the ubiquitous granite-kitchen-and-great-room addition, sprinkling potlights, then selling a few months later for twice what they paid. When it was still respected to be a capitalist, entrepreneur and risk-taker covered in drywall mud that was perfectly okay.

Today they’d be criminals. Tax cheats. Victims of a state insatiable for its pound of real estate flesh.

As the 2-4 weekend was about to start the CRA put out a boastful media release crowing about the way its recently Hoovered renovators, speckers and flippers. In the past three years the revenuers tore through 30,000 files on property deals, finding an extra $592 million in taxes and slapping on almost $44 million in penalties. Lately those penalties have been increasing annually by almost $20 million.

In the crosshairs are guys like ones who sold me that property.

“Property flipping is not illegal,” says the CRA. “Canadians have the right to purchase and sell property for a profit. However, the income resulting from these transactions is considered business income and must be reported to the CRA.”

That’s right. The money made improving a property you subsequently sell for more than you paid (or invested in) is considered income. That’s drastically unlike buying a weed stock that triples in value in 120 days which you can unload, claiming the profit as a capital gain. The reno profit is lumped on top of any other income you might have, 100% taxed at your marginal rate. In contrast, the capital gain from the weed stocks is a gift. Half the profit is completely tax free and the other half is taxed at your personal rate.

So, $200,000 in profit made flipping a house for someone with an outside income of $80,000 would result in overall tax of $64,120 and a marginal rate of almost 48%. But if the same person made the same gain on a stock, the year’s tax bill would be $40,800 and the marginal rate 5% lower. Besides, no drywall mud. No permits. No trades. No financing. No labour.

What about the defense that the renovated house was actually the principal residence of the guys who fixed it up, and therefore should be exempt from any tax?

No more. The Canada Revenue Agency says that ship has sailed.

“Individual renovators buy real estate, renovate it, live in it for a short time, and sell it so they can claim the principal residence exemption several times in their lifetimes,” says Ottawa. “The CRA acquires and analyzes third-party data and has found that some flips are not being reported or are being reported incorrectly. The profits from flipping real estate are generally considered to be fully taxable as business income. The facts of each case determine whether such profits should be reported as business income or as a capital gain.”

In other words, the principal residence exemption is kaput. The profit will be taxed as a capital gain (ouch!) or income (holy crap!). This clearly-stated shift in emphasis should help everyone understand why the annual tax return now requires details of any real estate sale to be spelled out. We’re clearly on the path to a much more restrictive definition of what tax-free profits will be. Watch for that.

But there’s more. The CRA is also lowering the boom on AirBnB rental proceeds (taxed as business revenue and added to all other sources of taxable income). It is now requiring condo developers on Vancouver and Toronto to hand over records of assignment sales for units which change hands prior to completion, making these flips fully taxable – again, as business gains (not capital gains). By sending an “unnamed persons requirement” to the developer, the feds force them to surrender lists of owners – which means they can then go after them for unpaid HST.

Meanwhile, a separate project is hunting down the undeclared income generated by all those basement suites and glorified garage-laneway rentals in the Lower Mainland. Remember, kids, if you rent part of your house and make any structural alteration to do so (a new doorway, a separate bathroom…) the capital gains exemption for the property could be damaged or lost. In a hood where real estate values have tripled, or more, that could be costly.

Tax, tax and more tax. Apparently the budget didn’t balance itself after all.

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May 18th, 2018

Posted In: The Greater Fool

One Comment

  • Grant says:

    I Dare sat, Garth, that being a bit poor, like myself, has its advantages. The consistent GREED of both governments and some corporation will totally bankrupt this country, if it has not already done so. A Yurt in the bush is looking more impressive all the time!!

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