In a recent court case 4490380 Canada Inc. v. The King (2024 TCC), the taxpayer—an experienced real estate investor—won an important victory against the Canada Revenue Agency (CRA).
The question at the heart of the case?
When you sell a property and make a profit, is that gain a capital gain or business income?
The answer matters—a lot.
If it’s a capital gain, only 50% of the profit is taxable.
If it’s business income, 100% is taxable.
That difference can mean millions of dollars in your pocket—or in CRA’s hands.
This case shows how CRA looks at your intention, your actions, and even your background to decide which side of that line you’re on.
And while the taxpayer ultimately won, the journey is a powerful reminder that when it comes to real estate, your intentions must match your evidence.
The Story: From Long-Term Rental to a $9.6 Million Dispute
Years before 2015, a corporate taxpayer purchased land in Gatineau, Quebec, and developed it into a commercial rental property.
This wasn’t a speculative flip.
The company financed the project with a 20-year mortgage and rented out the property for several years.
The rent collected was enough to cover the mortgage’s principal payments—a strong indicator that this was meant to be a long-term investment.
Then in 2015, someone came along with an offer the taxpayer couldn’t refuse.
They sold the property, realizing a $9.66 million gain.
The company reported the profit as a capital gain, consistent with what they believed the property represented—an income-producing, long-term investment.
CRA disagreed.
Despite years of rental history and long-term financing, CRA reassessed the profit as business income, arguing that the corporation had developed the property with the intention of resale for profit.
CRA’s Position: “You Were in the Business of Development”
CRA pointed to several factors:
- The company was part of a larger group of corporations that regularly engaged in real estate development.
- The property, though rented, was purpose-built—designed for commercial tenants but capable of generating a quick resale profit.
- The taxpayer agreed to sell when approached by a buyer, showing that the property was “available for sale at the right price.”
In CRA’s eyes, this wasn’t a passive investment—it was an adventure in the nature of trade.
In other words, CRA saw it as a business transaction.
The Court’s Analysis: What Matters Most
The Tax Court looked carefully at the facts and the taxpayer’s history.
It considered the five key factors the courts always use to determine whether a gain is capital or business income:
- Intent at the time of acquisition.
Did the buyer intend to earn rent or to sell for a profit?
- Nature of the property.
Was it an income-producing asset or land held for resale?
- Frequency of transactions.
Was this a one-off sale or part of a pattern of buying and selling?
- Relation to the taxpayer’s other business.
Was the taxpayer (or its related companies) already in development or construction?
- Actions taken after purchase.
Was the property rented long-term or immediately sold or listed for sale?
In this case, the taxpayer had held the property for years, collected rent, and used long-term financing.
They never advertised it for sale or treated it like inventory.
While the company’s related entities had development activity, this specific property had clear evidence of being held for investment.
That evidence was enough.
The Court ruled in favour of the taxpayer: the gain was a capital gain, not business income.
The Tax Impact: Why the Distinction Matters
Let’s look at how significant this difference can be.
The gain in question was $9.66M
If Treated as a Capital Gain
- Only 50% is taxable → $4,83M.
- That taxable half is taxed at roughly 50% as passive income in the corporation.
- Of that, about 30% is refundable when a dividend is paid out.
- The other 50% of the gain ($4.83 million) goes into the Capital Dividend Account (CDA) and can be paid to the shareholder tax-free.
After all the integration, the shareholder ends up with approximately $7.18 million after tax.
If Treated as Business Income
- The full $9,663,075 is taxable at 26.5%, resulting in $2.56 million of corporate tax.
- When paid out as an eligible dividend (taxed at 39.34% personally), the shareholder keeps only about $4.31 million after tax.
That’s a difference of nearly $2.9 million—just because CRA decided it was business income instead of a capital gain.
The Court’s Key Message
The Tax Court recognized that yes, the taxpayer could be persuaded to sell if the right offer came along.
But that doesn’t automatically turn an investment into a business.
The judge effectively said:
“Every property has a price at which its owner would sell. That alone doesn’t make the owner a trader.”
In other words, being open to selling doesn’t erase your investment intent—as long as the facts show that your original purpose was to earn rental income, not to flip.
What Real Estate Investors Can Learn
This case is a win for taxpayers—and an important reminder that CRA looks beyond your tax return to see what really happened.
If you’re investing through a corporation, here’s how to protect yourself:
- Document your intention at the start.
Keep notes, meeting minutes, or financing records showing you planned to rent and hold the property.
- Hold the property for income, not resale.
Even short-term rentals can help establish investment intent.
- Avoid developer-style activity in the same corporation.
If you build or flip, use a separate company. Mixing both can make all your gains look like business income.
- Don’t panic if you sell for the right price.
Selling doesn’t automatically make it business income—as this case shows, the Court will look at your entire history and purpose.
Related Post: Everything You Need to Know About Property Sales in Canada
The Takeaway
The taxpayer in 4490380 Canada Inc. v. The King won because the facts supported their story.
They acted like investors, not traders.
They built, rented, and held the property long enough to prove that the profit came from an investment—not from a business venture.
So yes—you can always sell at the right price and still be treated as a long-term investor.
Just make sure your paper trail matches your purpose.
Next Steps
We help everyday Canadians navigate the confusing world of taxes—so you can keep more of what you earn. Want to make sure you’re not leaving money on the table? Book a consultation with my team today.
Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Your Real Estate Accountant
