How Toronto Real Estate Flippers Can Legally Slash Their Capital Gains Tax?

The real estate market in Toronto moves swiftly and is very profitable if one knows how to increase the value of the property. But many local property flippers will be in for an unpleasant surprise come tax time. In recent years, the CRA has targeted the housing market in the Greater Toronto Area hard. When you purchase, improve, and sell a property in Toronto, CRA doesn’t consider your earnings alone—they consider your intention behind it. Without being very cautious, your real estate income won’t be considered a capital gain. They might be fully considered as business income or worse still, fall into the harsh clutches of the Anti-Flipping Rule. You should visit the best accountant in Toronto. 

Below is how Toronto property flippers can make their way through the complicated taxes in Ontario and save more of their hard-earned money. 

Dealing With The Dreaded Residential Property Anti-Flipping Rule 

First, you need to understand the law at the present time. In Canada, there exists a law called the Residential Property Anti-Flipping Rule that gives a definite time frame: If you purchase a residential property in Toronto and then sell the property within one year, all the money made from the sale is automatically considered as 100% business income. Moreover, you cannot apply the Principal Residence Exemption for that property. 

Workarounds through Legal Means: Life Exemptions 

There is no escaping the penalty for flipping that is less than one year old except when you qualify for certain documented reasons in life. These are: 

• Housing change: You have divorced, separated legally, or someone close to you died. 
• Job change: Your house needed to be relocated due to your job or business relocation. 
• Undesired damage: The property was damaged from a fire or natural disaster. When flipping for profits, you need to own the property for at least 365 days before starting negotiations. 

Comparison between Capital Gains and Business Income – “Intent” Test 

Having the property for 13 months does not necessarily mean that the transaction is subject to capital gains treatment. The intention behind the way the business is done will be assessed by the CRA. If the main business activity of the firm is purchasing, repairing, and selling, the CRA will consider the firm a real estate trader and thus will treat the profits from such business as business income. You need to visit the best tax accountant in Toronto. 

Ways to Show Investment Intent:

• Tenant Information: Let out the property using an Ontario Standard Lease after renovating it for a period of time. 
• Documentation: Provide proof such as emails, business plans, and financing documentation indicating that you initially wanted to earn income from rent but had no choice but to sell. 

Vigilantly Monitor Your Adjusted Cost Base (ACB)

There’s nothing simpler or perfectly legal than reducing your tax bill by decreasing your net gain through monitoring every single dime spent on the investment property. The tax calculation on your investment is based on your net capital gain, which is the difference between your selling price and ACB. Flippers in Toronto usually lose out on tens of thousands of dollars because of this oversight. 

Items to Include in Your Toronto Property ACB 

• Costs Associated with Transferring Land: These include both Ontario land transfer taxes and Toronto’s steep municipal land transfer tax. 
• Capital Improvements: Includes renovations such as installing heating and air conditioning systems, new beams and roofing (Note: ordinary maintenance costs cannot be included in ACB and should only be claimed in the current year). 
• Fees Payable to the City of Toronto for Building Permits & Zoning Approvals. 
• Legal & Brokerage Costs: Fees for your real estate lawyer and title insurance.Filing an organized digital copy of your receipt is highly recommended, as the CRA scrutinizes Toronto real estate costs carefully during audits. 

Flipping Corporate Structure 

When flipping houses in the GTA, performing your flips in your own personal name would be a huge tax error. The personal income tax rate in Ontario goes up to over 53.5%. By setting up a business in your province or federally, all your real estate flips would be taxed as corporate business income. 

Corporate Benefit: 

• Initial Tax Savings – Active income earned by a business within a corporation in Ontario is qualified for the Small Business Deduction, thereby taxing the income at a rate of roughly 12.2% on the first $500,000. 
• Tax Sheltering – You will only be taxed highly as a personal income earner when you withdraw the cash from the corporation as either dividend or salary. If you retain the earnings within the corporation towards your next investment in Toronto, you will have plenty of working capital. 

Conclusion 

The golden rule is to speak for a business loan in Toronto or for a mortgage in Toronto to the accountant. The rules related to the taxation of real estate in Toronto are always changing. Attempting to correct your tax return after the fact is very tough.Once you have made your offer for your next Toronto property, speak to a CPA who specializes in taxes. They will assist you with structuring your deal and making sure you do not incur an unnecessary huge bill from the CRA.