I hope everyone had a great May long weekend.
We spent our weekend at one of our favourite cousin’s wedding. My kids were the ring bearer and flower girl.
They had never been to a wedding before, let alone being part of the party. 😊
It was interesting to see how excited and yet calm they were during the ceremony when they walked in. (A proud mommy moment! 😉 )
They had a wonderful time hanging out with their cousins, but both Erwin and I were exhausted from watching them running around.
It was also a busy week at our local gym, Radix. I am in the middle of my 12-week challenge.
I’m super proud to report that I’ve made a few personal records in several weightlifting movements. 😊 I must say, I am constantly surprised by how much and how easy for everyone to improve by simply putting more focus on fitness.
We have all heard of the new year resolution of losing 10lbs. I said the same thing before, no plans, no efforts, and of course, no results.
This 12-week challenge forced me to refocus on my health and fitness level (step by step, day in and day out), allow me to improve myself to a different level that I have never challenged before.
Of course, I’m wise enough to say that my goal isn’t about losing 10lbs anymore. 😉
If there is an area in life that you would like to improve on, break it down and build it into something you can do every single day.
It can be as simple as changing your double-double from Tim Hortons to double-double with milk. 😉
Start in a small step, incrementally, day in and day out. My nanny now drinks coffee with honey, instead of white sugar and she loves it!
Now on to this week’s topic：
Canada Revenue Agency recently released their latest statistics on their effort cracking down unreported tax liability in the real estate sector.
We have been following this data since 2015 when it was first introduced.
I figured that it’s a good time to remind all real estate investors, flippers, land developers a few quick facts:
- Property flipping is considered business income. It is legally allowed, but you are required to report it accordingly. Most mistakes are made when the sale was reported as capital gain.
- Selling pre-construction condos/homes before closing is called assignment. In the past, assignors’ names are not readily accessible by CRA. CRA has since obtained court orders successfully to require builders to the assignors and assignees information. You cannot get away from not reporting the income. Big Brother is always watching!
- Assignment deals are subject to HST. Assignment deals are also considered flipping in the previous point and must be recorded as income, 100% taxable. You may think you can make a killing in selling assignment deals; there may be very little left after HST and business income tax.
- When you flip a house, it usually involves renovation. If you have renovated substantially, you will have HST exposure. This means that when you sell, you must consider HST impact on the sale price. One reader of my blog didn’t include HST in his calculation and was shocked to find out how much he must give up.
- Tearing down an existing house and building new ones are considered selling new homes. Even though you don’t have to pay HST on the purchase of the existing home, you must charge HST on the sale of the new homes. The entire projection of profit can be substantially different.
Make sure you speak to a qualified accountant with real estate background to consult on your financial matter.
Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Your Real Estate Accountant
Travis
Hi Cherry – In relation to item 5 (and maybe even item 4), it’s my understanding that HST is really not that big of an issue unless your margins are very small to begin with. Although you charge HST on the sale price, this is mostly offset by the HST that was incurred on all the expenses associated with the construction of the new home. You also get an HST rebate which varies depending on the value of the home. In other words, the the amount that you remit to the government = HST on sale price minus HST on construction costs minus HST rebate. Is this not correct?
Cherry Chan
Hi Travis, you can be right. But most flippers and some land developers did not pay HST when they purchase the piece of land/resale residential homes. This means that the majority of the cost does not have HST component in it. The only HST you paid is on the materials and contractors work.
HST rebate – you are also assuming the buyer is moving in and appropriate paperwork must be signed by the buyer indicating that they are using the newly purchased as their primary home.
Luc
For point number 3, what if you are assigning a resale property? IE: buy a 50 year old house for $100k, then assign the property before closing to another investor for $120k?
Cherry Chan
Assignment fees are subject to HST, new property or old property.