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THE TAXATION
OF GAINS FROM THE SALE OF REAL ESTATE
(Other Than Principal Residence)
[Updated - February 20, 2010]
One of the most controversial areas within the Income Tax Act is the tax treatment
of gains arising from the sale of real estate. In some instances, these are
considered to be business income, while in other cases they are treated as capital
gains.
The uncertainty arises because the word “business” is defined in the Income Tax Act
to include an adventure or concern in the nature of trade. Thus, even isolated
transactions involving real estate may be considered business transactions. If a
gain is deemed to be business related, it is included in its entirety in computing
income.
The issue whether a gain is business or capital is not specifically addressed in the
Income Tax Act. Consequently, the decision has been left to the Courts. Over the
years, the Courts have considered many factors to determine the appropriate income
tax treatment of the gain.
A summary of the most important of these factors is provided below:
(a) The taxpayer’s intention at the time the real estate was acquired.
(b) The feasibility of the taxpayer’s intention. Did the taxpayer intend to maintain
ownership or simply “flip” the property?
(c) The geographical location and zoned use of the property.
(d) The extent to which the taxpayer carried out his or her intentions.
(e) Evidence that the taxpayer’s intention may have changed after the real estate was
acquired.
(f) The nature of the normal business or professional activities of the taxpayer and
his or her associates.
(g) The extent to which borrowed money was used to finance the acquisition and the terms
of financing.
(h) The length of time during which the real estate was held.
(i) The existence of other persons who might share an interest in the real estate and
the nature of their occupations.
(j) The factors which motivated the sale of the real estate, and
(k) Evidence that the taxpayer and/or associates had extensive dealings in real estate.
None of the factors listed above are, in and of themselves, conclusive and the relevance of any
particular factor varies from case to case.
The Courts have held that it is possible for a taxpayer to have an alternative or secondary
intention at the time of acquiring real estate to re-sell it at a profit, even if the main
or primary intention is to maintain it as a long-term capital asset. If the secondary
intention is considered to assume primary importance, the gain will usually be treated as
business income.
The more closely a taxpayer’s business or occupation is related to the real estate industry
(e.g. a real estate agent), the more likely it is that any profit will be treated as business
income instead of as a capital gain.
Ordinarily, the Canada Revenue Agency and the Courts do not look at the charter powers of a
corporation. However, in the case of the sale by a closely held corporation, the Canada
Revenue Agency and the Courts will both recognize that corporate intention might not be
distinguishable from that of its officers, directors and shareholders. In other words, the
intention of the shareholders and their conduct with respect to real estate may be attributed
to the corporation.
If someone holds a passive investment in a partnership or syndicate that acquires real estate,
the tax consequences to the active members will be imputed to the passive members as well.
Also, if a sale of shares in a corporation is merely an alternative method of realizing
profits from the sale, then the profits from the sale of shares will be taxed as if the
real estate itself had been sold.
Where a taxpayer inherits land and disposes of it, the Canada Revenue Agency will generally
treat the gain on disposition as a capital gain. The Canada Revenue Agency recognizes that,
in some cases, parcels of farming or inherited land may be difficult to sell as a whole and
it may be necessary to subdivide and sell the lots individually. The Canada Revenue Agency
has stated that in their view, the filing of a subdivision plan and selling lots thereunder
does not, in itself, affect the status of the gain, notwithstanding the fact that subdividing
might enhance the value of the property.
On the other hand, if a taxpayer goes beyond a mere subdivision and installs improvements,
such as water mains, sewers or roads, or carries on an extensive advertising campaign to
sell the lots, the taxpayer will be considered to have converted the land from capital
property to trading property. Under such circumstances, it is conceivable that part of the
gain would be capital while the remainder would be fully taxable as a profit on the
disposition of inventory.
Planning Considerations
Investors must evaluate their planning strategies with respect to the type of ownership used
to acquire real estate. For instance, the use of a corporation may be beneficial for an
investor “flipping” real estate. Joint venture arrangements and other forms of syndications
may be considered when there are a number of investors. On the other hand, personal
ownership may be advantageous for a long-term holding period.
You should be aware that there is limited ability to restructure arrangements after closing
due to provisions of the Income Tax Act and because of land transfer tax implications.
"Information contained herein is of a general nature.
No action should be taken without seeking professional advice that takes
into account current developments and the specific facts of a particular
situation."