Let’s say you’re walking your dog past a hole in the ground, look up and see a LUXURY CONDO COMING HERE sign. It’s 2010 and you’re a little horny. You park the pooch, walk into the sales centre, write a cheque for five grand and buy a one-bedroom unit.
I mean, why not? Won’t be built for three long years, and in that time it’ll surely appreciate in value. If you don’t feel like living there for long, you can always sell the sucker to a greater fool. And because it’s your principal residence, any gains will be tax-free. Woohoo.
Now it’s 2013, the place is built and you list it. Good news. What you paid $260,000 for is now worth $380,000, and you’ve only had to pony up a fraction of the cost. You decide to sell, find a victim, close the deal, and think about the easiest $120,000 you’ve ever made – which you immediately recycle as a downpayment on a junker in Leslieville.
Then you get the call.
Adding to the misery settling over the most bloated condo market in the country is a new initiative by the Canada Revenue Agency to sacrifice flippers on the altar of F. Ottawa is now targeting those they think have not actually proven their residency, owned for too short a time, or intentionally entered into a real estate transaction with the ultimate intent of selling. For them, trouble.
Let’s remember how real estate is taxed. You’re allowed one principal residence that is used as your main home (on your driver’s license) and any money you make on it, you get to keep, no tax. Any losses are your problem – not deductible from income. Real estate that generates income (rental condo, duplex) or is a secondary residence (cottage, love nest) is subject to capital gains tax. Here you get to keep half the gain, and the other half is added to your annual income and taxed accordingly.
Flippers have their own special treatment. The revenue boys consider this to be a business (even if it’s not your occupation), and 100% of the gains are lumped in with your annual income and taxed at the marginal rate. That means, in our example above, that $120,000 is added to other earnings, likely bumping the flipper into the top tax bracket, and then taxed at a rate approaching 50%. Yikes.
Does it matter if you live there for a month, or three, or six, even if that’s your principal residence? Probably not. This is the government, after all. It can be as arbitrary as it wishes. It can come back on you years after you have sold a property, and reassess the transaction, classifying it as a business venture. You can certainly hire a lawyer and go to tax court, but good luck with that.
The condo market is especially tasty for the CRA these days since flipping units has been endemic among developers, brokers, offshore investors and the naive welder from Peterborough who went to a Brad Lamb seminar. Without sustained, long-term (give it a year) residency, the allegation is that the intention was always to dump the unit back into the market, and pocket the appreciation without reporting it as taxable income. Which, in many cases, it was. Duh.
Now, what about the market?
As I’ve told you, there are more than 30,000 condos currently for sale in the GTA alone. Over 6,000 are resales and more than twenty thousand are new and vacant. There are selling at a rate of about 1,200 a month, which represents a two-year supply. In turn, that means prices have only one direction in which to travel. So far in April, according to the Toronto Real Estate Board, condo sales in the GTA are 6% less than a year ago. And there are 60,000 more under construction. Almost makes ya want to join the CRA, doesn’t it?
By the way, TREB is fibbing again.
“Greater Toronto REALTORS® reported 4,260 sales through the TorontoMLS system during the first 14 days of April, representing a slight dip of less than one per cent compared to the same period in 2012,” the board said in its release this week. But a year ago it said this: “Greater Toronto REALTORS® reported 4,557 transactions through the TorontoMLS system during the first two weeks of April 2012.”
That’s a sales decline not of “less than one per cent,” but of 6.5%.
Man, do the realtors think we’re all idiots?
Don’t answer that.