When to re-sell?
I bought a pre-sale condo and it’s gone up in value. What if I assign the contract or just buy it and flip it before it’s ever occupied? How about after six months? A year? Is there even a rule?
And more importantly, is the profit a capital gain or business income?
Half of the capital gains are tax-exempt, whereas business income is fully taxable so how the sale is treated for tax purposes has major consequences for the seller.
How does the Canada Revenue Agency (“CRA”) determine whether proceeds from the sale of a condominium constitutes business income or a capital gain? This very question came before the Honorable Justice Wong in Stephen Bygrave v Her Majesty the Queen 2019 TCC 138. Justice Wong stated that the answer to this question is a question of fact.
Justice Wong emphasized the following list of factors the Supreme Court of Canada in Friesen v Her Majesty the Queen  3 SCR 103 restated from the Ministers of National Revenue’s’ bulletin IT-218R in determining whether the proceeds from the sale of a condo is business income or a capital gain:
1. Intention: The taxpayer’s intention with respect to the real estate at the time of purchase, the feasibility of that intention, and the extent to which it was carried out. An intention to sell the property for a profit will make the transaction more likely to be characterized as business income rather than a capital gain.
2. Taxpayer’s business or profession: The nature of the business, profession, calling or trade of the taxpayer and associates. The more closely a taxpayer’s business or profession is related to real estate transactions, the more likely the income will be characterized as business income rather than a capital gain.
3. Nature and use of Property: The nature of the property and the use made of it by the taxpayer.
4. Financing and Sale time: The extent to which borrowed money was used to finance the transaction and the length of time that the real estate was held by the taxpayer. Transactions involving borrowed money and rapid resale are more likely to be characterized as business income.
Of these four factors, the Federal Court of Appeal stated that the taxpayer’s intention at the time of acquiring the property is the most determinative factor.
The Supreme Court of Canada further stated in Friesen that if intention reveals a scheme for profit-making then the court will conclude that the transaction is business income. However, there must be a legitimate intention to gain a profit from the transaction. The fact that a taxpayer was induced to selling the property due to the offering of a sufficiently high price does not change the transaction from a capital gain to business income.
As with most cases, this one turns on its particular facts.
In this case, the Appellant was living together with his brother in a property they owned together at Cranston Park. The Appellant wanted to sell the Cranston Park property to move to a smaller property that was closer to work. The Appellant then placed an offer on a pre-construction home that was set to complete 2 years later (the “Maison Property”). Between the offer and completion date, the Appellant’s brother got married and had a child. Then a year later the Appellant’s father suddenly passed away at which time their mother decided to move back to Canada and live with them. The Appellant refinanced the property, to buy out his brother’s share. Once the Appellant’s mother came to live with him, the Appellant knew the Maison Property would be too small. At his realtor’s advice instead of assigning the property, the Appellant became the registered owner and listed it for sale after he took possession.
The Court found that the Appellant’s intention was not a scheme to make profits but resulted because of the unexpected death of his father and the new obligations he owed to his mother. Furthermore, the Appellant is a transit operator. Thus, his profession is not closely related to real estate transactions. Both of these factors lend themselves to the finding that this was a capital transaction.
However, the Maison Property was a residential apartment-style condominium which sold relatively quickly and the Appellant never lived in the property. Thus, Justice Wong stated that the third factor suggested a finding of business income.
Justice Wong found the fourth factor to be neutral on the matter as there was little evidence of financing, and while the period between taking title and re-selling was short, the period between entering the agreement and taking title was quite long.
Based on the analysis Justice Wong ultimately concluded that based on the factors, particularly that of intention, that the proceeds from this sale transaction should be treated as a capital gain.
By the way, the gain on the sale that CRA took issue with was a mere $13,412 (so don’t assume that because the profit was not huge that it will necessarily fly under the radar).
See the full case https://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/417669/1/document.do
THE MORAL OF THE STORY
There is no set rule about when to sell a property to ensure that the proceeds will be treated as a capital gain. The four factors listed in the case above are what CRA and the courts will look at.
Take steps to document your intention when you are considering a real estate purchase. If your plan was to rent the property out for investment income, keep a list of the rental property management companies that you obtained quotes from, ads on Craigslist or other media advertising for rentals that you may have placed, investigations that you made concerning rental restrictions in the building, etc.
These will all come in useful if your circumstances change and you have to convince CRA that you really did intend to hold the property as an investment when you made the offer to purchase.
In addition, be prepared to advance a credible reason why you chose to sell the property rather than rent it out as originally planned.
For example, we have several clients who purchased pre-sale condominiums well before the Foreign Buyers Tax was enacted in the summer of 2016 and the sales have not yet completed. The ever-changing tax landscape has adversely affected our clients to the extent that they simply cannot complete the purchases due to the extra 25% tax that they have to come up with to close.
That is an example of what I would consider a valid change of circumstances, however, CRA has still not made a decision on a whole raft of such cases (including our clients’) both from a capital gains/business income and a GST perspective.
DISCLAIMER: This is not legal advice, but is presented for information purposes only. Statutory and case law changes frequently, so it’s always advisable to obtain legal, tax, accounting or other professional advice prior to making real estate decisions.
Feel free to call us if you have questions: Pazder Law Corporation (Kenneth Pazder or Melissa Valana 604-682-1509)