One Comment About Taxation – New Anti-Flipping Rules For Dispositions of Residential Real Estate

One of the more ridiculous Canadian legislative rules introduced recently into the Income Tax Act (and believe me, there’s a lot of ridiculous income tax legislation in our Act), is the so-called “anti-flipping” property rules that took effect on January 1, 2023.  It’s a great example of politics clouding proper income tax policy.  It was introduced following the 2021 Liberal Party election policy platform promises.  Apparently, the Income Tax Act was not robust enough to deal with taxpayers who buy residential real estate and “flip” it quickly for economic gain.  Such people will often treat those economic enrichments as capital gains for taxation purposes (which have preferential tax treatment in Canada since only 50% of the gain is included in taxable income) and in some cases the taxpayer will claim the principal residence exemption (“PRE”) to exempt the entire gain from taxation.  To deal with this perceived problem, new subsections 12(12) – 12(14) of the Act will deny capital gains treatment if the disposition occurred prior to 365 days of consecutive ownership from acquisition subject to some “life event” exceptions – such as death, separation, threat to personal safety, involuntary termination of employment and other events –  that are laid out in the new rules (the future Canada Revenue Agency – “CRA” – audits of some the “life events” are a discussion for another day).

First, are these new rules necessary?  I’ve spoken publicly about these many times.  The policy rationale for these new rules is laughable and pure politics.  The Income Tax Act is certainly robust enough to deal with “flippers” of real estate to deny capital gains treatment as to have such treatment the property that is being disposed of must first be a capital property and not inventory.  There is plenty of case law that distinguishes between inventory profits vs capital gains. If the property being disposed of is not capital property – but instead inventory – then the profit is fully taxable (and thus not eligible for the PRE since to be eligible to claim the PRE the property being disposed of must be a capital property in the first instance).

Further, dispositions of all property must be reported by an individual on their personal tax returns.  This now includes dispositions of principal residences.  Prior to 2016, the CRA had an administrative policy that stated that dispositions of property that were eligible for the PRE did not need to be reported.  In my opinion, such an administrative policy invited abuse since some taxpayers would aggressively or naively take the position that the disposition of a residential real estate property was eligible for the PRE.  In many cases it was not.  Now, the CRA has all the visibility it needs to audit claims of PRE or dispositions of property that it might feel should not be afforded capital gains treatment. Some proponents of the new anti-flipping rules have been saying that because there is now a “bright-line” of greater than 365 days of consecutive ownership from the acquisition date, the need for audits by the CRA will go down.  My short rebuttal is that I don’t agree: there is a lot more than just a short period of ownership that goes into determining whether or not a disposition of a residential real estate property is on account of capital or a disposition of inventory.

In addition, the new flipping rules are poorly drafted.  There is a good Canadian Tax Foundation article published earlier this year that can be accessed here (CTF members only) that discusses these rules.  In addition, there are several traps such as whether or not certain types of transactions – including section 85 rollovers, spousal rollovers and rollovers to life interest trusts such as alter ego trusts – will “re-set” the clock for the 365 consecutive day rule to apply.  My good friend and brilliant tax practitioner – Michael Cadesky – wrote about this in a short LinkedIn post here.

These silly new rules need to be repealed as soon as possible.  In the meantime, be careful out there.

 

One Comment About Leadership – The “Open Door” Policy

I started my practice in 1994 which through many machinations ended up with Moodys Tax being founded in 2007.  Throughout my career, I have employed many and held many leadership positions within the tax community.  As I learned how to be a leader, one of the tools that I found helpful was to have an “open door” policy.  For example, in a traditional office setting, I always strive to have my office door open except if I am on a confidential phone or video call.  In other settings (especially with remote or hybrid work arrangements), I try to emulate the “open office door” by making it easy for colleagues to contact me (by email, text, phone calls, etc) with prompt replies.  My experience is that an open office door says something important that you are available to chat.  Combine that with a “no question is a stupid question” policy and it can be a powerful message being sent to the people you lead.  If your office door – either physically or virtually – is constantly shut, a strong negative message is being implicitly sent – that you’re too busy or maybe even “too important” to be bothered.  That is not a good message to send when you are trying to lead and build a team culture.

But there are downsides to an open door policy.  The most obvious is that you might be “too available” and encourage constant disruptions so you can’t get anything done.  However, with proper mentorship, I think this obvious downside can be dealt with.  For example, over the years, if a colleague constantly walked through my office door (or emailed me or texted me frequently), I would mentor that person and ask them if they have fully thought through the alternatives or issues before they asked for my guidance.  If the interruption is simple laziness (“hey Kim, do you know what the washroom code is?” or “hey Kim, do you know where an extra copy of the Income Tax Act is?”, etc.) then that kind of constant interruption can be swiftly dealt with.

I have found that there is an important balancing act that needs to be dealt with when making yourself available.  Obviously, you want to avoid the extremes. Don’t encourage constant interruptions that are not productive (in other words, your door is “too open”) and sending a strong message that you’re not available / “too important” to be interrupted (in other words, your door is “closed”).  The key is to find the optimal availability to encourage proper mentorship of colleagues, encourage collegiality and contribute to a positive overall culture while minimizing non-productive interruptions and getting your important tasks done.

Leaders, I’d encourage you to explore an open door policy and find the balance – your balance – away from the above-noted extremes.  My experience is that it is important and it works.

 

One Comment About Economics – “Economics 101”

 As my career as a father continues to evolve (my wife and I are proud parents to four young adult sons ranging in age from 18 to 27), it’s been fun to watch them learn about basic economics.  Despite their upbringing with an opinionated father – who despises largesse government that can’t live within their means – and many dinner-time conversations, it doesn’t seem to have sunk in for some of our young sons until lately.  Some of my sons are trying to find their way with their career choices, and the others are embarking on post-secondary education while working during the summer to save money.  I have been the recipient of phone calls from most of them and this is a typical conversation:

Son – “Dad!!! There’s something wrong with my paycheque!  I think my Boss screwed up!  I worked 100 hours and was supposed to get $1,700 but all I got was $X!!!  What do I do??? 

 Dad – “Well, Son, I’m sure there’s nothing wrong.  Read me your paystub.”

 Son – “Paystub??!! – what’s that?”

 Dad – “You should have received something by paper or electronically that reconciles the amount they paid you.”

 Son – “Hmmm…..yeah, I think I recall getting something like that.  Let me check my texts.”

 Dad – “Yeah, I don’t think your employer would have texted you.  They likely emailed you.”

 Son – “Email??  What’s that?”

 Dad – “Oh come on….”

 Son – “Ok, I found it.  So it says right here that they should have paid me $1,700 but all I got was $X.!!!”

 Dad – “Does the column where the $1,700 appears say something along the lines of “gross pay”?”

 Son – “Yes.”

 Dad – “Ok, move across the columns.  Do you see columns that say Employment Insurance, Canada Pension Plan and Tax?”

 Son – “Yes”.

 Dad – “Ok, when you add the EI, CPP and tax columns and subtract those amounts from the gross pay column, what do you get?”

 Son [after frantically using their phone calculator with a bunch of dead air time] – “Hmmmm…..I get $X!”

 Dad – “Well, there’s your answer, Son.”

 Son – “What??!!  What do you mean?  I didn’t authorize those CPP, EI and tax payments! And who are those guys??”

 Dad – “Sigh….didn’t you listen to any of my dinner-time rants??!!”

And it goes on.  Of course, I’m embellishing slightly. My point is, however, that it takes a little wake-up call for most youngsters to realize that what they earn is not at all what they keep in their pocket.  With a high inflationary environment, what people keep in their pockets is shrinking since inflation is like a tax…it comes right out of your pocket with higher prices.  Combine that with federal and provincial governments that spend taxpayers’ monies irresponsibly and the pressure to pick the pockets of our youngsters even more aggressively will continue.

My proposition is that all of Canada’s youngsters should learn basic economics.  It should be mandatory in elementary and high school for our youth to learn how our country provides for infrastructure, social benefits, education, health, etc.  It is ultimately paid for by taxpayers that most of them will grow up to be.  To be a prosperous and responsible citizen, an informed citizen is a better citizen.

Bonus Comment – Quote From The Founder of Rotary International – Paul P. Harris

As mentioned above, I believe that our Canadian youth need to be better informed about basic economics.  In that light, the founder of Rotary International, Paul Percy Harris once stated:

Individuals and nations owe it to themselves and the world to become informed.

Whole-heartedly agree!

 

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