CRA’s focus on real estate audits paying off

Construction in Vancouver, BC, Canada. — AdobeStock / edb3-16

Ontario and B.C. real estate are proving lucrative for the Canada Revenue Agency.

The agency identified $426 million in additional tax and penalties related to transactions in the two provinces’ real estate sectors during the 2022–2023 fiscal year.

The CRA increased its focus on non-compliance in major centres such as the Greater Toronto Area and B.C.’s Lower Mainland beginning in 2015. The cumulative value of additional tax and penalties assessed from April 2015 to March 2023 stands at $2.7 billion from around 75,000 total audits.

In 2019, the federal government boosted the CRA’s efforts further, pledging $50 million over five years to create a real-estate task force, plus $10 million annually on an ongoing basis.

The government seems to be getting its money’s worth, said Anna Malazhavya, founder of Advotax Law in Toronto.

“It’s one of, if not the most profitable audit projects of the CRA,” she said.

According to the CRA’s data, almost 53,000 of its real-estate audit files were related to Ontario claims for GST/HST rebates available on new or significantly renovated homes. Together with a further 6,000 rebate audits conducted in B.C., these files have generated more than $800 million in combined assessments and penalties since 2015.

When a buyer intends to flip a new or significantly renovated property, the CRA notes the property may be ineligible for a GST/HST rebate, known as the new housing rebate. Meanwhile, taxpayers whose primary residence is outside the country would not qualify for the new housing rebate, as the property would be a secondary place of residence.

Malazhavya said the CRA’s recent focus on GST/HST is reflected in her own practice, which consists predominantly of tax files with a real estate component.

“The CRA still see this as a major, major revenue generator. It’s not a very time-consuming or difficult audit to conduct,” she said, pinpointing 2018 as the moment when GST/HST cases began to spike.

Before then, Malazhavya said most of her real estate clients were facing income tax audits based on allegations of underreported income or misuse of the principal residence exemption. Since 2018, she’s seen the agency making better use of its powers to obtain purchaser information from commercial builders and others involved in constructing new real estate.

“The quality of audit investigations has improved quite significantly,” Malazhavya said. “Now of course, there will always be people caught who have done nothing wrong, and that’s where we come in and have to protect them.”

David Rotfleisch, tax lawyer with Rotfleisch & Samulovitch Professional Corp. in Toronto, also acts for clients caught up in audits and said a significant focus of his work is on penalties levied by the CRA.

The CRA reported that since April 2015, 3,432 penalties amounting to $336 million were applied in real estate cases, representing 4.6% of the 74,699 total audit cases for the period.

The Income Tax Act allows the CRA to apply a penalty equal to 50% of the avoided tax if the taxpayer knowingly makes a false statement when filing their return. Rotfleisch said courts have consistently held that the CRA must prove a penalty is warranted — but that doesn’t always stop the agency from applying the penalties in the first place.

The $426 million identified by CRA audits last year matched the figure assessed for 2021–2022, but was down from the 2019–2020 peak of $527 million.

Malazhavya said the figure could rise again, noting that the Covid-19 pandemic caused many CRA investigators to work at reduced capacity or be reassigned to other projects, including misuse of the Canada Emergency Wage Subsidy.

For example, one of her clients had a real estate audit paused in 2020, only to be notified in the last couple of months that the case was being reopened.

“We have seen these audits coming to life just recently,” Malazhavya said.