The second option is to complete the deal yourself and to then try to sell the property to someone.

Option # 2 – After Closing
In this option, you close the deal, either because the developer of a pre-sale document will not permit assignment of it before closing, because they know what game you are up to, and don’t want to play it; or you can’t find someone who will take over your position and pay you for it; or it was your intention to close the deal. Once you have the deal closed, you then put it back on the market right away, or hold it for several months in an increasing market.

Inherent Risks
The risks in this option include those outlined in the first example. As well, you could end up having to negative debt service your invest­-ment, as you don’t want to rent it out and tie up the property. The reason is you never intended to become a landlord. You want to have it available for purchase by an investor or end-user. In the latter case, if you are buying a brand new home, an end-user might not be interested if has been rented. If you are buying a new home, you will have to pay GST on the purchase price, which you don’t have to do if the home has been “used”, (an older home or one that is, or has been rented). Also, if you close the deal and put it back on the market, you could be paying a real estate commission that could end up eliminating your profit, and could even end up costing you money if the market slows down, interest rates go up, and the prospective buyer pool shrinks.

Another issue you need to consider is the tax issue. If you have a pattern of buying multiple properties at the same time or sequentially, and selling them right away in a hot market without adding value, you could be deemed by the Canada Revenue Agency to be in the “business” of buying and selling properties.

If you sell a property you have held for some time for investment purposes, the normal tax policy would apply, where you have to pay tax on 50 per cent of the capital gain from your original purchase price to the net sale price. There could also be other deductions you could be eligible to take off, to reduce the gain.

However, if you are deemed based on the facts and circumstances, to be in the business of flipping properties, CRA could deny your attempt to claim capital gains tax, and deem all the money you have made as income. That would certainly increase your tax payable, as well as increase the speculative risk you would be taking, and expose you to a significant tax hit.

The first option on flipping (discussed in the previous column) would almost certainly be deemed by CRA as being in the speculative business of buying and selling properties, and be considered as income, not capital gain.

If you live in the property as a primary residence before you sell it, it could be per-ceived differently. However, it depends on your pattern of buying and selling and the distance in time. For example, if you keep selling your primary residence, on average, six months after you buy a home, that could be considered suspect in terms of your business motivation. If you are audited, you could be faced with the claim by CRA that you are in the business of buying and selling properties, and you would be taxed based on income, and not capital gains.

However, if you legitimately had concerns with an area due to crime or noise or any other factors that impact on quality of life, or had to move due to work or other reasons, than an ongoing pattern of buying and selling could be explained.

Before you embark on a strategy to buy and sell real estate frequently for whatever reason, you need to obtain experienced professional tax and legal advice in advance to structure your activities properly.  CL


Excerpted with modification, from 101 Streetsmart Condo Buying Tips for Canadians, by Douglas Gray, published by John Wiley & Sons in May, 2006. Copyright  2006 by Douglas Gray. All rights reserved. Any reproduction of this material without the author’s advance written consent is prohibited. The author assumes no responsibility whatsoever for any information provided above, as the purpose of the column is for general information only, and not intended to provide professional advice.