Sometimes a real-life story can provide lessons for the rest of us – and for the Canada Revenue Agency (CRA). The case of Bygrave v. The Queen (2019 TCC 138) is just such a story. A decision handed down by the Tax Court of Canada on June 25 sided with the taxpayer, but Mr. Bygrave had to endure more than five years and three court decisions to win his case.
It was 1998 when Stephen Bygrave purchased a townhouse in Vaughan, Ont., with his brother, where they lived together. In 2005, Mr. Bygrave thought about living apart because his brother had met a young woman and was going to get married.
So, in 2006 Mr. Bygrave purchased a condo that was in the preconstruction phase. It was a small condo and was scheduled to be done in early 2008. His brother did get married, in 2007, and Mr. Bygrave continued to live in the townhouse with his brother and sister-in-law. As it turns out, 2008 came with some unexpected events. First, Mr. Bygrave’s condo was not completed on time and his move-in date would be delayed. Second, and most importantly, his father passed away in December.
In 2009, Mr. Bygrave and his brother took their mother into the home since she wasn’t comfortable living on her own after her husband’s death. Mr. Bygrave chose to buy out his brother so that he and his mother could live in the townhouse, and his brother used the proceeds to buy a different home for his family.
Mr. Bygrave recognized that the condo, which was still not completed, would be too small for both his mother and him, so he decided to sell it when it was eventually built. It wasn’t until August, 2010, that the condo was completed, and he took possession. He put it up for sale right away, and sold it in November, 2010, for a small gain of about $13,400.
The tax treatment
In 2014, the CRA chose to reassess Mr. Bygrave and tax him on the profit on his condo as regular income, not a capital gain, and to apply gross negligence penalties to boot. Now, it’s the case that capital gains on real estate can be taxable as business income if the owner intended, for example, to flip the property for a quick profit. This is called an “adventure in the nature of trade” (AINT). Business income, of course, is fully taxable, unlike capital gains, which are only partly taxable (one half of capital gains are tax-free).
As an aside, the courts have defined the factors to consider when determining whether capital gains treatment, or business income treatment (as an AINT) is more appropriate. The most important factor is your intention at the time you purchased the property. If your intention was to sell the place and not live in it, your transaction could be an AINT and you could face business income treatment.
Second, what is your line of work? Do you sell real estate for a living? If so, this could be a strike against you when it comes to arguing for capital gains treatment. Third, what is the nature of the property and use that you made of the place? Finally, did you borrow money to buy the property and how long did you hold it? The more you borrow and the shorter the time you hold the property, the more this points to business income treatment.
Mr. Bygrave was a public transit employee, not an expert in real estate. And although he didn’t live in the condo and only held it for a short time, it was clear that his intention when he bought the property was to live there. The decision to sell only arose after his father’s death and his need to live with his mother. So, Justice Susan Wong concluded that capital gains treatment is appropriate and that the penalties applied should be reversed.
It’s clear from this story that the CRA is focusing a lot of attention on real estate transactions. So, make sure you understand the factors the taxman will consider when determining the tax treatment of any sale. Next, the CRA is taking such a hard line that it will assess gross negligence penalties if it believes that you should have known that the tax treatment should be business income rather than capital gains.
Perhaps most disturbing is the fact that, where the intention of a taxpayer should determine tax treatment, the CRA doesn’t seem to care to understand the true intention of an individual. The taxman is simply assuming the worst about that intention, and assessing on that basis. This needs to change. Nine years and multiple court appearances for Mr. Bygrave should never have happened.
Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author, and co-founder and CEO of Our Family Office Inc. He can be reached at firstname.lastname@example.org.