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Income tax — sale of condo was not a "flip" for profit

My clients were a retired couple. They signed a deal in 2005 to buy a new (to be built) 2-bedroom condominium near their daughter, so they could care for their young grandchildren while their daughter worked. Their adult son intended to live with them.

By the time the condo was ready in 2008, their son had moved to another city to take a new job and live with his girlfriend. The condo was thus too big for my clients, and although they moved in after closing the purchase, a few months later they listed it for sale, and sold it for more than they paid. They treated this as a sale of their principal residence and so did not report any gain on their tax returns.

The CRA reassessed my clients on the basis that the sale was business income — i.e., that they had bought the condo intending to "flip" it for a profit. The CRA also assessed gross-negligence penalties. My clients, who had done nothing wrong, found themselves with a bill from the CRA for $46,000.

I filed a detailed notice of objection, supporting by numerous documents and affidavits, to show that my clients had intended to live in the condo indefinitely, and only sold it because of the change in circumstances. This included evidence that they had upgraded and customized the finishings to their personal tastes;had required a second parking space for their son; evidence of the son's new job; and other supporting documents. I also provided a detailed analysis, citing case law and CRA interpretations, to show that under the Income Tax Act this was a sale of capital property so that the principal-residence exemption applied.

Some 18 months later, when an Appeals Officer finally reviewed the file, she immediately agreed with my submission and cancelled the reassessment.

Problem vanished!

(2014)