Real Estate: CRA Audit Activity

Posted on September 6th, 2024 in Construction & Real Estate, Domestic Tax

Realtor standing in front of a red sold sign. The realtor is female and wearing a blue sihirt.

CRA uses a combination of risk assessment tools, analytics, leads, and third-party data to detect noncompliance in the real estate sector. They have identified ten areas where they perceive that there is a significant risk of non-compliance, as follows:

reported income does not support lifestyle (e.g. acquiring expensive assets like real estate without an obvious income source to support it);
property flipping (buying and reselling homes within a short period with the intention of selling them for a profit; CRA has identified three main categories of flippers: professional contractors, or renovators speculators, or middle investors, and individual renovators);
unreported capital gains on the sale of property;
unreported capital gains on property sold by non-residents and insufficient withholdings, if required, when purchasing property from non-residents;
unreported worldwide income by Canadian residents;
unreported GST/HST on the sale of a new or substantially renovated home;
improperly claimed GST/HST rebates (e.g. when a taxpayer applies for a new housing or rental rebate but actually intended to flip the property for a profit);
not classifying oneself as a land developer; • not properly reporting/claiming the principal residence exemption on an individual’s personal tax return; and
an individual’s status as a realtor (as a realtor’s main revenue stream is from the sale of real estate, CRA has identified them as a higher-risk population).

Based on a historical review of CRA’s webpage, it appears that the following three points were added in 2024: land developer, principal residence exemption, and status as a realtor.

In 2015, CRA increased its focus on real estate non-compliance in major centres, such as the greater Toronto area and British Columbia’s Lower Mainland (the greater Vancouver area). From 2015 to the Spring of 2023, CRA reported that the cumulative total of additional taxes and penalties assessed was $2.7 billion, derived from approximately 75,000 audits. While British Columbia only has about a third of the population of Ontario, CRA identified roughly the same amount of tax non-compliance over the past eight years ($1.4 billion in BC and $1.3 billion in ON). Non-compliance in British Columbia is largely related to income tax, while in Ontario, it is largely related to unpaid GST and HST on new homes or inappropriately claimed rebates on those taxes. More recently, during the 2022 to 2023 fiscal year, CRA identified $426 million in additional tax and penalties in the real estate sector in Ontario and British Columbia.

Ensure that all real estate earnings and dispositions are properly reported and supporting documents retained. Be prepared for extra CRA scrutiny and review.

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Article originally published in: Tax Tips & Traps 2024 Third Quarter – Issue 147.