Real Estate: CRA Audit Activity

CRA uses a combination of risk assessment tools, analytics, leads and third-party data to detect non-compliance in the real estate sector. They have identified ten areas where they perceive that there is a significant risk of non-compliance, as follows:

• reported income does not support lifestyle (e.g. acquiring expensive assets like real estate without an obvious income source to support it);
• property flipping (buying and reselling homes within a short period with the intention of selling them for a profit; CRA has identified three main categories of flippers: professional contractors or renovators, speculators or middle investors, and individual renovators);
• unreported capital gains on the sale of property;
• unreported capital gains on property sold by non-residents and insufficient withholdings, if required, when purchasing property from non-residents;
• unreported worldwide income by Canadian residents;
• unreported GST/HST on the sale of a new or substantially renovated home;
• improperly claimed GST/HST rebates (e.g. when a taxpayer applies for a new housing or rental rebate but actually intended to flip the property for a profit);
• not classifying oneself as a land developer;
• not properly reporting/claiming the principal residence exemption on an individual’s personal tax return; and
• an individual’s status as a realtor (as a realtor’s main revenue stream is from the sale of real estate, CRA has identified them as a higher-risk population).

Based on a historical review of CRA’s webpage, it appears that the following three points were added in 2024: land developer, principal residence exemption and status as a realtor.

In 2015, CRA increased its focus on real estate non-compliance in major centres such as the greater Toronto area and British Columbia’s Lower Mainland (the greater Vancouver area). From 2015 to the Spring of 2023, CRA reported that the cumulative total of additional taxes and penalties assessed was $2.7 billion, derived from approximately 75,000 audits. While British Columbia only has about a third of the population of Ontario, CRA identified roughly the same amount of tax non-compliance over the past eight years ($1.4 billion in BC and $1.3 billion in ON). Non-compliance in British Columbia is largely related to income tax, while in Ontario, it is largely related to unpaid GST and HST on new homes or inappropriately claimed rebates on those taxes. More recently, during the 2022 to 2023 fiscal year, CRA identified $426 million in additional tax and penalties in the real estate sector in Ontario and British Columbia

Action: Ensure that all real estate earnings and dispositions are properly reported and supporting documents retained. Be prepared for extra CRA scrutiny and review.

Crypto-Assets: Reviews and Audits

A recent communication from CRA indicated that they have roughly 400 ongoing audits or examinations related to crypto-assets, including 125 “intent to audit” letters sent to taxpayers that they believe did not report income obtained through cryptocurrency trading on Coinsquare. In 2021, CRA required Coinsquare, via an unnamed persons requirement (UPR), to provide information on its 16,500 top users from 2014 to 2020. These letters provided the taxpayer with 45 days to voluntarily contact CRA to declare any missing crypto-related income, in which case CRA would waive any penalties and interest. CRA noted that failure to respond may lead to a full audit of the taxpayer.

While CRA only reassessed $54 million in undeclared income last fiscal year, a director general at CRA has noted that CRA’s activity is evolving rapidly and that CRA will adjust their compliance measures as the risk of non-compliance changes.

In addition, CRA commissioned a poll in 2023 that found one-third of respondents did not have a “firm grasp” of their tax responsibilities surrounding crypto-assets. On a knowledge test of the tax rules surrounding crypto-assets, cryptocurrency users tested just over 50%.

CRA has stated that they are considering issuing additional UPRs to other exchanges until the government implements the crypto-asset reporting framework proposed in Budget 2024. The proposals would require crypto-asset service providers to file an annual report that includes customer and transaction information with CRA commencing in 2026.

Action: Ensure that crypto-asset transactions are properly reported. Save and store records on an ongoing basis.