A Principal Residence audit occurs when the Canada Revenue Agency audits a taxpayer for the sale of one, or multiple properties where no taxes are paid. No taxes are paid because the taxpayer is claiming the Principal Residence Exemption, which shields any possible taxes owing.
Why did I Receive a Principal Residence Audit?
The CRA audits taxpayers who claim the Principal Residence Exemption because it allows the government to claim that taxes should have been paid on the sale. This means that the CRA goes from receiving no taxes, to possibly hundreds of thousands and even millions. The CRA has an incentive to tell taxpayers that they are not eligible for the Principal Residence Exemption, and they should be paying taxes.
How is this Possible?
The CRA will typically tell taxpayers that they are running a business of buying and selling homes. This normally happens where a taxpayer sells multiples properties over a short period of time. However, this may occur even if a taxpayer has only sold one property. There are many factors that go into this analysis, with the most common being frequency of any purchase and sales, and how long you lived in the property.
What to Expect during a Real Estate Audit?
First you will receive a letter from the CRA asking you for information and documentation. This letter will also request that you complete a questionnaire related to all of the properties you have purchased and sold during a certain time period. It is crucial that you seek assistance in responding to this first request because it can be the difference between paying no taxes, and paying tens of thousands of dollars in tax.
After you have responded to this first letter, you will receive a proposal letter. This letter explains the CRA position and explains whether or not you should be paying taxes on the sale of your Principal Residence.
You have an opportunity to respond to the proposal letter before you receive a final letter. This final letter contains the CRA’s decision. If you disagree with the final decision, you will have to file a Notice of Objection to continue your effort to pay no tax on the sale of your Principal Residence.
The Worst Part
If you are found to be running a business, it is possible that the CRA claims you should have been charging GST/HST on the sale of your property. What this means is if you sell your Principal Residence, only to be audited down the road. The CRA may claim that you owe them tens of thousands in taxes and penalties, and in addition, possibly hundreds of thousands of GST/HST.
If you receive a Principal Residence audit letter, you should consider consulting with a lawyer at Rosen Kirshen Tax Law immediately. This audit may mean the difference between owing hundreds of thousands of dollars in taxes, penalties, and GST/HST or owing no taxes to the CRA because you are found to be eligible for the Principal Residence Exemption. Call us today to see what we can do for you!
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.