Judge Provides Interesting Comments During a Court Case on Unreported Condo Sale

Kids are cute and unpredictable. But they’re kids only once.

I am not perfect.  I am far from perfect.

A client of mine and I were in a self-learning seminar earlier this week.  I shared part of my everyday struggle with the group.

At the end of the session, she said to me, “I didn’t know you still have so many issues and struggles to deal with.  I thought you and Erwin have figured it out!  I follow your blog every week and you seem so organized.”

The truth is – I am not.

I wanted to get up at 5am in the morning so I could organize my day and get ahead before everything gets too busy.

I put the kids in bed early, slept early, planning for a brand-new day.

Robin woke me up right at midnight.  I struggled to fall back asleep for two hours.  Just as I was about to fall asleep finally, she walked into my room staring at me by my bed side.

I asked her, “what’s going on? It’s bed time. Go back to sleep.”

5am came, she came over to my bedside again.  Once more, I sent her back.  She left and came back and said “mommy, but I am scared.”

I let her slip in my bed this time.  She cuddled with me and kissed me multiple times until we woke up.  

In the morning, I was lecturing her on why she shouldn’t wake mommy up in the middle of the night.  She’s 4.  She doesn’t understand the commitment I have during the day.  She looked down and uttered, ‘but mommy, I love you.’

It’s as if she’s telling me the reason why she’s waking me up at night was because she wanted to be with me.  

I feel so guilty and ashamed to be upset with her.

How can I be mad at a little girl who just wants to be with her mother when she sleeps?

Sometimes, no matter how much I plan, I can’t always have my way.  And my way is not necessarily better.

Having a productive morning does not trump cuddling with my daughter.

I didn’t have the most productive morning that day.  I didn’t have the most productive mornings for the next four days. Laziness and excuses kicked in.

Today, I woke up at 5:30am to write this blog.  I don’t have everything down.  I have something done, and I am striving to put everything in my life on autopilot.  

It takes time.  It’s a continuous improvement.  I have the vision and I am working toward it.  But please do not mistake me or Erwin as “perfect” or as “model” examples.  

We are just struggling the same way everybody else does.  

Everyone starts somewhere.  😊

Onto this week’s topic.

Another court case (DaCosta et al. v. The Queen. Tax Court of Canada, November 24, 2017) came out late 2017 regarding unreported income on the sale of two condo units.

Two taxpayers, a grandmother, Cynthia, and a minor granddaughter, Denise, each purchased a condo unit under construction.

Cynthia, a real estate agent, sold her unit the same month as closing.

Denise sold hers the month after.

They didn’t report any of the income on their tax returns.  

If you’ve follow my blog long enough, you would have known that sale of a real estate property can be taxed either on the income account or capital account.

If it is taxed on the income account, it means 100% of the profit must be reported as income.

If it is taxed on the capital account, it means 50% of the profit are subject to tax.

Now, how do you determine whether the sale of a property is on income account or capital account?  CRA follows a bunch of criteria to make such conclusions. The duration of ownership, taxpayer’s profession, financing arrangement, etc. are all taken into consideration when such a decision must be made.

  • Both taxpayers owned the properties for barely a month or two.
  • Cynthia had been a real estate agent for 23 years at the time when the tax returns were filed.
  • Cynthia reported only $20,000 net income in her 2010 tax returns.  She had significant line of credits.  Denise made $7,000 income at the time.  They both showed that they had no financial capabilities to afford these units.

The judge ruled that the sale should be on income account.

It also didn’t help that the taxpayers did not hire any professional help.

Because they didn’t seek a legal representative, the judge felt that he should point out potential issues that were not addressed by the taxpayers.

  1. Denise was a minor at the time and 21 now.  The judge found that Denise relied heavily on her grandmother and her father (both are real estate agents) to guide her through the entire process. 

    The judge pointed out that Denise could have raised the issue that Cynthia was truly the beneficial owner of the condo unit under Denise’s name.Hence, the tax would not have been imposed on Denise’s tax return.

    Cynthia, technically, would have been required to report the sale of Denise’s unit in her tax return, on top of the one in her own name.

    But the judge has no power to increase Cynthia’s taxable income.

    The Unit held in Denise’s title would not have been taxed at all.

    Interesting a judge would provide such comment. 😊

     

  2. We mentioned earlier that Cynthia and Denise were in no position to qualify for mortgages. 

    The judge raised a second issue that the beneficial ownership of the condos was not even disposed in 2010.  “The legal titles were merely transferred to close family friends in order to fool a bank into indirectly providing financing to Cynthia.” 

    If the beneficial ownership was never disposed of, Cynthia and Denise were under no obligations to report the so called “sale”.  It would have been considered merely a legal title transfer.I thought these two points mentioned at the end of the judgement was very interesting.  These are not loopholes but rather comments based on the case evidence provided.

Lessons learned?

  • Hire a professional to represent you
  • Proper documentation must be kept substantiating your claim
  • Report your income!

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Your Real Estate Accountant

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