The growing number of rental property owners looking to minimize capital gains taxes at the point of sale may be in for a rude awakening and a hefty fine, cautions one property expert.
“You can only avoid capital gains by selling a property that you’ve declared to be your owner/occupied dwelling. You’re only allowed one capital gains-free transaction, which is the sale of your personal residence.”
What some owners attempt to do is to develop a scenario by which they appear as the owner/occupying resident of a property that is, in fact, a rental.
In order to prove to CRA that a property is owner/occupied some people attempt to document occupancy by having such things as driver’s licences and tax filings in the address of the property.
If you think it’s easy to get away with, you’re in for a shock, like the hundreds of people CRA caught two years ago after cracking down on condo flippers. Over 600 income tax audits were completed with almost half of that number receiving penalties.
“Some people were buying properties in their children’s names, typically condos, and saying they were living there, while in fact it was being rented,” says Butler.
The penalty for attempting to avoid capital gains taxes is double, plus interest, from the date of the transaction.
For the mortgage broker’s part, says Butler, it’s “our duty to know when we’re applying for the mortgage whether it’s a rental property or not.”
“I’ve seen people who try this and get rental insurance and that information is sent to the mortgage company and they immediately cancel the mortgage because it was claimed as owner/occupied and now they have rental insurance.”