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The taxman knocks at the door of real estate speculators

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Published July 2, 2010 at 6:33 | Updated July 2, 2010 at 6:40

You should know that when an individual sells a house, the profit he makes can be considered either as capital gains or as business income. Everything depends on his intention.

Stephanie Grammond

Press

(Montreal) For 10 years, home prices have more than doubled in the Greater Montreal. Owners who have enriched themselves without paying tax, could be visited by the tax authorities. Primary residence, cottage, plex … What are the pitfalls to avoid and tips to use to pay as little tax as possible?

The Inland Revenue launched a warning shot for home builders and speculators who got rich thanks to the explosion in housing prices.

More and more individuals are building or renovating a house, condo or income property in order to sell quickly for cash a juicy profit. But few realize that the gain may be regarded as business income, which costs more tax.

For the pin, the Canada Revenue Agency has implemented special programs for checking the resale home for speculation.

Over the last two years, the Agency has done 287 audits that have allowed him to recover $ 2.85 million of taxes evaded, across Canada. This represents a sum of about $ 10,000 per taxpayer. And it is likely that these individuals do also audited provincial tax.

“There is a mechanism for sharing information that will allow us to contribute cases assessed by Revenue Canada, but not audited by Revenue Quebec,” says spokeswoman Revenu Québec, Valérie Savard.

Since June 2006, Revenue Quebec is also conducting its own testing program targeting the speculators: the project “Real estate”. “The tax recovery associated with this type of file is several million dollars in unpaid taxes,” said Dr. Savard.

Audits up

“There are many checks on the ground. I see a lot of records now, “said Jean-Francois Thuot, a partner at Raymond Chabot Grant Thornton.

“Rising property values in recent years has attracted investors, says the tax. There are taxpayers who have embarked on activities, not necessarily speculative at first, but who have turned a bit later. ”

Indeed, the price of homes has more than doubled in the Greater Montreal in a decade.

The price of plexes exploded by 161% from $ 145,000 in 2000 to $ 348,000 in early 2010. The single-family home prices jumped 129% in 10 years, from $ 108,000 to $ 248,000. And the price of condominiums has ballooned 118%, from $ 94,000 to $ 205,000, according to the Federation of Quebec Real Estate Board.

In this context, the tax is on the lookout and maintains audit programs. “It is still valid for this year, has since discovered that there was a non-compliance in the construction and renovation of the house,” warned the spokesperson of the Agency, Kareen Dionne.

The thought that counts

To understand the source of the problem, you should know that when an individual sells a house, the profit he makes can be regarded as either capital gains or as business income. Everything depends on his intention.

If his goal was to survive long term in the House, the Inland Revenue considers that this is a capital gain, taxable only half. For example, a gain of $ 100,000, only $ 50,000 is taxable.

This can cause a tax bill of up to $ 24,100 for a taxpayer who already earns $ 127,000 and is taxed at a maximum rate of 24%. For a taxpayer who earns $ 50,000, the tax would amount to about $ 20,800, said Sylvain Chartier, consultant to National Bank Private Banking 1859.

However, the surplus will be completely exempt from tax if the individual identifies the house as his principal residence.

But the situation may be quite different when an individual decides to buy, build or renovate a house for the purpose of reselling at a profit. “He goes to a status where the manufacturer is no longer the capital gain, but rather the business income,” says Chartier.

Having lived temporary home with his family will not change. If the goal was initially to sell the house at the earliest opportunity, it is business income … fully taxable. A gain of $ 100,000, the tax bill may reach $ 48,200 so the maximum tax rate, or $ 44,200 for a taxpayer earning $ 50,000.

In short, the tax bill is at least twice as high.

Grey area

Between capital gains and business income, the line is not always easy to draw. “The more business or occupation of the individual approaches the real estate, more likely it is that the gain from the sale or business income,” reads an information sheet which found on the website of the Canada Revenue Agency.

Or when financing arrangements. “Have you got a short-term funding or funding does not provide for penalties in the event of early repayment?” Asked the treasury.

Have you kept the house for a short time? Have made several other similar transactions over the years? There are other elements that will put the chip in the ear of the treasury.

But beware! “An individual is not working in the field of residential construction to have a business income from the sale of a home and selling a home can only give rise to business income” shows the Revenue.

The tax bill on the sale of a house

Tax treatment of a gain of $ 100,000 depending on the circumstances

Primary residence (tax free) $ 0

Second home (taxable capital gain half)

- For a taxpayer who earns $ 127,000: $ 24,100

- For a taxpayer earning $ 50,000: $ 20,800

Buy speculative (fully taxable business income)

- For a taxpayer who earns more than $ 127,000: $ 48,200

- For a taxpayer earning $ 50,000: $ 44,200

http://lapresseaffaires.cyberpresse.ca/finances-personnelles/201007/02/01-4294861-le-fisc-cogne-a-la-porte-des-speculateurs-immobiliers.php?utm_categorieinterne=trafficdrivers&utm_contenuinterne=envoyer_lpa

Parents owners, beware of tax!

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Published July 2, 2010 at 6:41 | Updated July 2, 2010 at 6:46

It is crucial to be well documented … otherwise the tax authorities could treat the transaction at fair market value, rather than the value of parent-child transfer.

Stephanie Grammond

Press

(Montreal) Parents generous station in taxes! In recent years, some have bought a house with their child who did not pass the test of the financial institution.

This is the case of Peter and Denise who helped their son Julian to buy a triplex $ 145,000 in 2001. They have lent him $ 45,000. But instead of making him a loan, they became co-owners, as banks often required when the financial situation or credit is too brittle.

Since then Julian has repaid his parents and he has strong enough to be the owner of the building itself. The parents would simply withdraw, without making a profit, even if the house is valued at $ 300,000. “We learn that this operation involves a capital gain. Is there a way to avoid it? “Asks the couple.

The answer would have been easier if this delicate question had been raised at the outset. In such a situation, we must write a letter-cons and submit to the Treasury, ideally at the time of purchase, “says financial planner and tax expert Michel Lavoie. The document will state that the parent has bought the house for and on behalf of her child, only for funding purposes, without intent to be co-owner and the child is the sole owner.

“This must be done properly, at the very beginning. Otherwise, we run the risk of small problems later, “said Jean-Francois Thuot. For families who have not sent a letter-cons, other signs may indicate the unwillingness of ownership: Who paid for the maintenance of the building? Who paid the taxes, utilities? What name appears on the lease? Who paid the tax on rental income over the years?

It is crucial to be well documented … otherwise the tax authorities could treat the transaction at fair market value, rather than the value of parent-child transfer.

http://lapresseaffaires.cyberpresse.ca/finances-personnelles/201007/02/01-4294864-parents-coproprietaires-gare-au-fisc.php

How to reduce the tax on the cottage?

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Published July 2, 2010 at 6:47 | Updated July 2, 2010 at 6:51

It may be advantageous for couples to include the cottage on behalf of the spouse who has the lowest incomes.

Stephanie Grammond

Press

(Montreal), Gilles and Claudette have built their cabin in the sweat of their brow in 1995. The project has cost them $ 80,000 in materials. Today, the couple is on the cusp of retirement and is considering selling his second home that is worth about $ 250,000. The transaction raises a number of tax issues.

The materials cost $ 80,000, but how our workforce is it considered?

“Unfortunately, people who build themselves can not include their time in the calculation of the cost,” says Sylvain Chartier, consultant to National Bank Private Banking 1859.

In the case of Gilles and Claudette, the gain will be calculated between the construction cost ($ 80,000) and the sale price ($ 250,000).

All costs of renovation (expansion, pool, cabana, etc..) And transaction costs (transfer taxes, notary fees, commissions paid to brokers, etc..) Also reduce the taxable capital gain.

Owners should therefore always keep their bills even for their primary residence, because you never know in advance how property will be most advantageous to designate as your principal residence.

“Often people do not keep their documents when it comes to a home they do not lease. But it can be problematic in the context of a tax audit, “says Jean-Francois Thuot, tax specialist at Raymond Chabot Grant Thornton.

Which house should I designate as your principal residence: the cottage or house in town?

Firstly, we must know that every family is entitled to one “principal residence” is exempt from tax. It may be a house in town, a cottage, part of a plex inhabited by the owners, or even a “mobile home”. The important thing is that the family lived there part of the year, not even a week.

The decision is made at the time of sale. To make the best decision is to compare the gain on the two homes, taking into account the duration of detention. In the case of Gilles and Claudette, the cottage has appreciated $ 170,000 in 15 years, or about $ 11,000 per year. The value of their house in town, built 25 years ago, jumped $ 80,000 to $ 350,000, a gain of $ 270,000, slightly less than $ 11,000 per year.

Since there is little difference, it may be advantageous to designate the cottage as a principal residence to avoid paying an immediate tax bill. Later, the couple may designate his home town as a principal residence for the period he was not the cottage (from 1985 to 1995 and years following the sale of the cottage).

But we must also take into account the rate of taxation of both spouses …

Who will pay the tax bill: Gilles, Claudette, the two?

Claudette has annual revenues of $ 15,000, while Gilles earns about $ 40,000. As she pays less tax than her husband, she can add the capital gain of the cottage on his statement? Yes, because it is the sole owner of the cottage.

This shows that it may be advantageous for couples to include the cottage on behalf of the spouse who has the lowest incomes. But beware: “We see situations where one spouse owns the cottage, without having ever worked in his life,” says Chartier. The tax could be considered the richest spouse who actually bought the house … and pass it a part of the tax bill.

Should we wait to take our retirement to sell the cottage?

Soon, Claudette will retire and his tax rate will decrease even more. But that does not necessarily bother to postpone the sale of the cottage to limit the tax bill. If interest rates go up, if the housing market is slowing down, the couple could have more trouble getting his price. And within two years, paying all maintenance costs, taxes, etc.. Overall, the shift of the sale is perhaps not so paid. “The advice I give: stop thinking about the tax! Be practical! “Said Chartier.

Is it beneficial to leave the cottage to our daughter for her to sell it for us?

When giving the cottage to her children, one is deemed to have disposed of at fair market value, exactly as if we had bequeathed a legacy. So you have to pay tax on capital gains anyway. There is no way out.

For example, if Claudette gives the cottage to his daughter, the mother should pay tax as if it had sold $ 250,000. If the cottage is assessed thereafter and that the girl sells, say, $ 350,000, will be deemed to have acquired from his mother for $ 250,000 and must pay tax on the gain of $ 100,000 , unless it is his principal residence.

Can I sell my daughter to a ridiculously low price?

Make a friendly price, it can always happen. “But selling at $ 1 is the worst scenario,” warns Mr. Chartier. The Inland Revenue will impose the mother according to the fair market value ($ 250,000). But when the girl will sell the cottage in turn, its gain will be calculated based on a purchase price of $ 1. In other words, the family will pay tax twice!