Are house-flippers all paying their taxes? CRA probing 128 home sales

CTV Vancouver: CRA probing house-flippers The CRA is investigating a host of recent Metro Vancouver real estate transactions over concerns about house flippers not reporting income.

How would you like to make hundreds of thousands of dollars in just a few months by doing virtually nothing? It sounds like an outrageous pitch from a late night infomercial, but it’s real.

House flippers in Vancouver are cashing in on the red hot market, scooping up properties and re-selling them months later for a substantial profit. That has the Canada Revenue Agency ramping up its investigations into what it calls “pockets of risk” in the market, which includes flipping.

CRA told CTV News it’s concerned sellers may not be properly reporting house flips and paying the taxes they should.

Realtor Mebal Meng said it’s becoming more common to see properties being sold multiple times in a short period of time. One of her listings on Vancouver's west side sold for $2.7 million in November 2014, then for $3.1 million in May 2015, and again for $3.3 million in November 2015.

“Local people are doing it. Foreign investors are as well,” said Meng.

Some fear flipping is pushing up prices in an already over-heated market, and now there are growing concerns that some speculators are dodging taxes.

“There’s a risk that people are not reporting the income,” said tax specialist Arthur Azana.

If someone is planning on flipping a home, the profit is supposed to be treated as ordinary business income, Azana said.

For example, a seller who made $500,000 on a house flip would be subject to 47.7 per cent tax rate – a tax bill of $238,500.

If it’s a capital gain and not the seller’s principal residence, the tax owing is $119,250.

A principal residence exemption allows the seller not to pay any tax.

“I’m sure there are situations where people are flying under the radar,” said Azana.

CRA has audited and reassessed 41 cases since last April and levied $1 million in tax to these sellers. It also issued gross negligence penalties in 13 cases, amounting to about $750,000. The agency is pursuing another 128 cases, so dozens of others could be facing higher tax bills.

The stepped up enforcement comes as the B.C. Real Estate Council announced it will appoint an advisory group to investigate allegations of “shadow flipping” – a practice in which sales contracts are reassigned, in some instances multiple times, before the sale of a home is closed.

Assignment sales are not recorded so if people aren’t reporting them, governments are losing out on income tax dollars.

Vancouver Mayor Gregor Robertson has also called for a speculation tax to discourage flipping, a measure the provincal government has so far resisted.

Tax experts argue there's already a disincentive to house-flipping, provided peope file the appropriate taxes.

"In theory there already is a speculation tax – it’s the Income Tax Act," Azana said. "If someone is buying property with the express purpose of flipping it, it’s supposed to be fully taxed.”

Whatever the CRA is doing to crack down on tax evaders, so far it doesn’t appear to be cooling down the frenzy of speculation.