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Real estate can be taxing

Many people consider real estate as one of the most level-headed places to put your money these days. What is crazy, is the number of Canadians who think they can sell these properties tax free.

By now you're probably aware that residents of Canada are able to shelter the sale of a principal residence from tax by using the family's principal residence exemption (PRE). But in order to claim the PRE, you've got to "ordinarily inhabit" the residence.

I've met a growing number of people who have chosen to buy a residence, move in and "ordinarily inhabit" it for a short time, then flip the property for a profit. These folks plan, of course, to use their PREs to shelter the sale from tax.

The fact is, our tax law doesn't define what it means to "ordinarily inhabit" a place. Even Canada Revenue's Interpretation Bulletin IT-120R6 on the subject doesn't help much. What I can tell you, from the court decision in Ennist et al v. MNR (1985), is that 24 hours isn't long enough. Normally, however, it's not necessary to spend significant time in a place to be entitled to the PRE. Your intentions at the time you buy matter more than the length of time you live there.

The problem, though, is that the taxman might assume your intention all along was to flip the property for a profit. If that was your intention, then the transaction is generally considered to be an "adventure in the nature of trade" (AINT). And if the transaction is considered an AINT, you "ain't" claiming the PRE.

To claim the PRE, the property must be capital property. Where there's an AINT, the property is not considered capital property, but business inventory. The result is that any profit on the sale will be taxed as business profits, not capital gains. Sorry, no PRE and no tax-free sale. A couple of recent court decision support this notion: Doody et al v. The Queen (2000), and Isaaks v. The Queen (2001).

In each of these cases, the court determined whether the transactions were an AINT by looking at each taxpayer's intention and whole course of conduct. The taxman and the courts will try to determine your intention by your actions, not by what you tell them.

The bottom line? You need to stack the evidence in your favour, when selling a property you've owned for a short time, if you hope to claim the PRE and make it a tax-free sale. Visit a tax professional for this type of planning.

© The Globe and Mail

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