Photo by R ARCHITECTURE on Unsplash
Words by Mathew Lam
For the last 2 decades, it seemed real estate investments was the no-brainer. Individuals would renovate and flip homes, sell on assignment, become a landlord or simply just buy and hold. Some of these property owners were shocked to find out that they have certain tax filing obligations or worst – a surprise tax bill.
Here are a few real estate ownership scenarios that may trigger the unexpected:
- Underused Housing Tax – Depending on your residency status, or whether you own residential real estate via a corporation, partnership, trust or acting as a trustee, you may be subjected to the new UHT filing requirements that we’ve highlighted in our previous blog. Although tax may not be applicable the non filing penalty starts at $5,000/individual
- Toronto Vacant Home Tax – Toronto has just increased the tax rate from 1% to 3% of the property’s market value for vacancies occurring during 2024. This applies to Toronto residential properties that are considered vacant if:
- the property was not the principal residence of the owner or any permitted occupants or was not occupied by tenants for a total of six months or more;
- the property was not eligible for an exemption; or
- the property was deemed vacant because the owner failed to submit a declaration of occupancy status or any required supporting documentation.
- Assignment sales – Individuals that put a deposit on a new construction can earn a decent rate of return if their interest in the soon to be built property was sold on assignment. If CRA deems the primary purpose in selling the interest is in the course of a business or an adventure or concern in the nature of trade, the individual could be classified as a builder for GST/HST purposes. GST/HST would then apply to the sale of their interest. Furthermore, depending on the individual’s intentions, the profit could be fully taxable as business income.
- Flipping houses – If you are easily bored of your new house and are constantly moving in and out, CRA may tax 100% of the profits earned. Living in your home for a short period (typically less than 365 days), selling it for a profit, buying a new home, and repeating this pattern over and over could have you classified as a “house flipper”. There are exceptions that may still allow you to treat this as a capital gain and utilize your principal residence exemption, but CRA will be cracking down on these transactions.
- Airbnb and short-term rentals – Many people have either purchased new properties or converted their existing home/cottage for the use in the short-term rental market. Be mindful that if your short-term rental revenue (plus income from any other commercial activity you may have on an associated basis) exceeds $30,000 within 4 consecutive calendar quarters, you are required to become a GST/HST registrant and charge GST/HST on your rental fees. Also, depending on the usage, frequency and availability of the rentals, the property may be considered a commercial property. This reclassification of your real estate may trigger GST/HST on the market value of the property when it is disposed of.
We wouldn’t be able to keep this brief and cover all possible real estate scenarios and their tax implications. However, the above examples are typical situations that are encountered. If you require more clarity on your real estate ownership, please contact your Farnham + Company representative.