By Barry McGuire
We’ve all heard the stories. In red-hot real estate markets like Toronto and Vancouver, brand new projects—especially condo projects—sell out fast. When pre-build sales open, there are lineups around the block. Desperate purchasers clutch serious deposit money in their anxious hands, hoping against hope that by the time they get to the front of the line, there will be a unit left for them to buy. Often, when sales to the public start, a 100-unit project has only 40 units left; the others are already sold. So, who got to buy those units, and how does that work?
Recent news reports and investigations show that, long before sales to the public are opened, connected people—including developer associates, realtors, and insiders—have prior access for offers to purchase, tying up properties. And, in many cases, these connected buyers sell the offer to purchase or, more accurately, they “assign” their interest in the offer to purchase to another buyer. They collect the difference between their sale price to the ultimate buyer and their purchase price from the developer as their “assignment” fee.
This transaction doesn’t appear on any public record. Sometimes properties are flipped or, more technically, “assigned” two or three more times before an ultimate buyer closes on the deal. At each stage, an assignment fee is paid. Our friends at the Canada Revenue Agency (CRA) are well aware of this practice. And further, they are well aware that many assignments are never reported. This type of earnings is most likely straight business income and therefore fully taxable. What to do?
Last year, the CRA obtained court orders regarding 40-plus condominium projects in the Greater Toronto Area. These court orders forced the developers to provide the CRA with information about those folks who bought and sold their unit before completion. The CRA has been analyzing the documentation from these 40-plus projects, and the agency fully intends to prosecute any “flipper” who did not report their assignment income. Anyone caught in the CRA net will end up paying full tax on their assignment profit as well as interest for late payment and penalties for failing to pay, and, in some cases, those flippers will go to jail.
Is this difficult for the CRA? Will they have trouble proving their case? Here’s a quote from William Howse, a Toronto tax lawyer, that appeared in a Globe & Mail article in October:
Anybody who assigns an offer, sells an offer for a profit, will be caught by the CRA. One hundred percent guaranteed that the CRA will be able to identify the sales and the amount of the gain … For auditors, can you imagine how easy it is?
What’s our takeaway? Remember, the principle applies to all monies earned on flips or assignments. It doesn’t matter where you are: Toronto, Vancouver, Saskatoon, or St. John’s. If you’re flipping or assigning, there is tax to pay.
If you flip a property, don’t expose yourself. Do the right thing. Report the flip to your accountant and let him or her put the best possible spin on it with the CRA. Don’t let them come after you for the tax plus interest, penalties, and potential jail time!
1. Report flip/assignment profit. It’s taxable!
2. The CRA is actively looking.
3. Work with your accountant to get the best tax treatment.
Barry McGuire is a veteran real estate lawyer, investor and best-selling author, based in Edmonton, Alberta. His Focus Series Workshops are well received by his students and his strategies and money saving advice put dollars into the pockets of the investors that use them. You can reach Barry at B.McGuire@rmlo.com.