With the economy in turbulence, some Canadians have openly started to wonder whether our housing market may be next. Despite that possible scenario, the temptation to buy, renovate and then sell real estate at a profit is still irresistible for many. And, if you don’t know how to get started, a number of U.S. TV shows have debuted in the past couple of years with names such as Flip or Flop, Flip it Forward and, most recently, Flip Addict that will walk you through the process.
You should be aware, however, that if you are indeed successful in making a profit from your real estate activities, the taxman will be watching and will want a piece of the action. Of course, just how big a piece he’ll want depends on whether your profitable sale is treated as a capital gain, in which case only 50% is taxable, or business income, in which case 100% is subject to tax.
Take a recent tax case involving a Montreal woman who found herself in Tax Court fighting CRA reassessments for her 2007, 2008 and 2009 tax years, in which she disposed of six real estate properties and reported over $100,000 in profits as 50% taxable capital gains. The CRA sought to reassess these transactions as business income and thus fully taxable. Of note, the average holding period of five of these properties was nine months and she financed her properties through a closed, one-year mortgage.
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