Last updated: September 13 2023

7 Big Audit Errors CRA is Catching, Worth Billions

Evelyn Jacks

CRA is sharpening its audit focus on Canadian real estate owner and it’s worth billions. Up to 5 different tax returns can be reviewed: the T1, T2, T3, the GST/HST return, and the new Underused Housing Tax.  Recent real estate audit activities in two provinces, BC and Ontario, have been particularly fruitful with  over $1 billion in tax reassessments that have resulted in each province along with over 3,000 gross negligence penalties amounting to close to $300 million more in the period April 2015 to March 2022.   We’ll discuss the 7 big audit errors every professional advisor needs to know about at the CE Summit on September 20 and invite you to register by September 15 for an early bird offer.  Here’s a brief synopsis:

Real estate owners will want to be sure they can pass the CRA audit tests, even if they are not reporting rental income.  Consider the following tax traps: 

  • Reported income does not support lifestyle – specifically, buying expensive home, without an obvious income source, can be seen by CRA as the potential for unreported income on income tax returns.  This is a tax trap that can lead to a net worth assessment and a probe for source of funds.
  • Property flipping – this is buying and selling property over short time frames, which CRA would consider to be fully taxable business income rather than capital gains income. CRA notes that it acquires and analyzes third-party data to make its determinations.  They look at transactions from three types of taxpayers:
    • Professional contractors and renovators
    • Speculators or “middle investors” who buy property before it’s completed and flip it to another owner who may or may not be the final owner
    • Individuals to buy and renovate homes to maximize use of the Principal Residence Exemption
  • Unreported capital gains on the sale of property.  It’s really important to report the sale of a principal residence even if it qualifies for a principal residence tax exemption.
  • Unreported capital gains tax on property sold by non-resident.  Brush up on the rules for the requirement for withholding taxes, Section 216 tax return filings and the Underused Housing Tax.
  • Unreported worldwide income – Canadian residents must report their worldwide income on the Canadian tax return. It’s a big audit problem when international cross referencing occurs.  Are real estate transactions, pensions and investments being reported here in Canada?  If not, get filings be up-to-date with the help of a tax specialist.
  • Unreported GST/HST on the sale of a new or substantially-renovated home.  The builder must collect and remit the GST/HST when the home is sold.  But if the home is rented instead, the builder is deemed to have sold the home to themselves. The GST/HST is payable at once on the fair market value of the home, including the land value.
  • Rebates – Tax rebates may be available to the builder or purchaser of a building – the New Housing Rebate is available if they live in the home as a principal residence, or the New Residential Rental Property Rebate is available if the home is rented.  The problem arises when the property is flipped.  In that case the owner must charge and remit the GST/HST on the sale.

Make a Difference.  Brush up on these key audit areas to ensure income and capital is properly reported on the tax return and acquisition/disposition transactions and their source of funding can be tracked.  For a deeper learning experience, please enrol in the virtual CE Summit on Sept 20.