Achi news desk-
The CRA increased its focus on non-compliance in major centers such as the Greater Toronto Area and BC’s Lower Mainland starting in 2015. The cumulative value of additional tax and penalties assessed between April 2015 and March 2023 is $2.7 billion from a total of approximately 75,000 audits.
In 2019, the federal government further boosted the CRA’s efforts, pledging $50 million over five years to create a real estate task force, plus $10 million annually on an ongoing basis.
The government appears to be getting its money’s worth, says Anna Malazhavya, founder of Advotax Law in Toronto.
“It’s one of the CRA’s most profitable audit projects, if not the most,” he said.
According to CRA data, nearly 53,000 of its real estate audit files related to Ontario claims for GST/HST refunds available on new or substantially renovated homes. Along with 6,000 additional refund audits conducted in BC, these files have generated more than $800 million in combined assessments and penalties since 2015.
When a buyer intends to flip a new or substantially renovated property, the CRA notes that the property may be ineligible for a GST/HST rebate, known as a new housing rebate. Meanwhile, taxpayers whose main residence is outside the country would not be eligible for the new housing rebate, as the property would be a secondary residence.
Malazhavya said the CRA’s recent focus on GST/HST is reflected in her own practice, which primarily includes tax files with a real estate component.
“The CRA still sees this as a big, big revenue generator. It’s not a time-consuming or difficult audit to conduct,” he said, citing 2018 as the moment when GST/HST cases began to increase.
Previously, Malazhavya said most of her real estate clients faced income tax audits based on allegations of underreported income or misuse of the principal residence exemption. Since 2018, she has seen the agency make better use of its powers to obtain buyer information from commercial builders and others involved in new real estate construction.
“The quality of audit investigations has improved quite significantly,” Malazhavya said. “Now of course, there will always be people caught who have done nothing wrong, and that’s where we come in and have to protect them.”
David Rotfleisch, a tax lawyer with Rotfleisch & Samulovitch Professional Corp. in Toronto, also acts on behalf of clients caught up in audits and said a significant focus of his work is on penalties levied by the CRA.
The CRA reported that since April 2015, 3,432 penalties worth $336 million have been applied in real estate cases, representing 4.6% of the total of 74,699 audit cases for the period.
The Income Tax Act allows the CRA to impose a penalty equal to 50% of the tax evaded if the taxpayer knowingly makes a false statement when filing his tax return. Rotfleisch said courts have consistently argued that the CRA must prove a penalty is justified — but that doesn’t always prevent the agency from imposing the penalties in the first place.
The $426 million identified by CRA audits last year matched the figure assessed for 2021-2022, but was down from the 2019-2020 peak of $527 million.
Malazhavya said the figure could rise again, noting that the Covid-19 pandemic has caused many CRA researchers to work at a reduced capacity or be reassigned to other projects, including the misuse of the Canada Emergency Wage Subsidy.
For example, one of her clients’ real estate inspection was delayed in 2020, only to be notified in the last few months that the case was being reopened.
“We’ve seen these explorations come to life recently,” Malazhavya said.
The CRA focuses on these 10 areas in its real estate inspections
- Reported income does not support lifestyle
- Flipping
- Unreported capital gains on sale of property
- Unreported capital gains tax on property sold by a non-resident
- Global income not reported
- GST/HST not reported on new home sales
- Improperly claiming GST/HST refunds
- Not classifying yourself as a land developer
- Improper reporting of the principal residence exemption
- Status as an estate agent
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