Real Estate Tax Lawyer: CRA Audits of Property Sales, Flipping and HST

Profit from selling real estate can be taxed in three very different ways. If the property was your principal residence for every year you owned it, the gain is generally tax-free. If it was a long-term investment, the gain is a capital gain, half of which is taxable. If you bought it with the intention of reselling at a profit, or you are in the business of buying and selling property, the entire profit is business income, and for new homes the sale may also be subject to HST.

The CRA looks at your intention at the time of purchase and your conduct: how long you owned the property, whether you lived in it, how it was financed, how many properties you have bought and sold, and whether the sale was prompted by an unforeseen event. Courts have also recognized secondary intention, where resale at a profit was a motivating consideration at the time of purchase.

For dispositions on or after January 1, 2023, a profit from selling a residential property (including a rental property) owned for less than 365 consecutive days is deemed to be business income, and the principal residence exemption is not available, unless an exemption applies. Exemptions cover certain life events, including death, a household addition such as a birth, separation, personal safety, disability or illness, an eligible job relocation, involuntary disposition and insolvency.

Properties held longer than 365 days are not automatically protected. The CRA can still argue that the profit is business income based on the facts.

The GTA's market has produced a set of recurring disputes. We regularly handle the following matters.

Since 2016, the sale of a principal residence must be reported on the seller's tax return, with the designation made on Schedule 3, even when no tax is payable. The CRA can accept a late designation, but a penalty may apply, and unreported sales may remain open to reassessment beyond the normal three-year period.

The federal Underused Housing Tax was eliminated beginning with the 2025 calendar year, but obligations, penalties and interest for the 2022 to 2024 years continue to apply. Ontario's Non-Resident Speculation Tax and municipal vacant home taxes are separate and remain in place where applicable.

Winning a real estate case is about evidence of intention: mortgage applications, correspondence with agents, renovation records, the reasons for the sale and the history of the property. We help assemble this record during the audit and, where necessary, present it through objection and Tax Court appeal. We also challenge gross negligence penalties and reassessments of years the CRA should no longer be able to reopen.

Before selling, confirm how long you have owned the property, whether it was your principal residence for every year, whether any part was rented out or used for business, and whether any purchaser on title did not live there. If any answer raises a question, get advice before closing, while there are still options to structure the sale and records properly.