The recent decision of Bishara c. Agence du revenu du Québec is a win for a taxpayer on the sale of three condominiums in quick succession. This decision is unusual because the Quebec Court of Appeal (“QCA”) reversed the decision of the Court of Québec based on testimony and documentary evidence and held that the gains realized by the taxpayer were on capital account. Finding that the taxpayer provided a coherent explanation for his multiple moves, which was corroborated by other evidence, the QCA concluded that he did not have an intention, at the time of acquiring the residences, of reselling them for a profit.
The Canadian tax system characterizes gains realized on the sale of property as business income or capital gains. The characterization is crucial because capital gains on residential property may qualify for the principal residence exemption from income tax. The taxpayer’s intention at the time he or she acquires the property is an important factor distinguishing business income from capital gains. Where a taxpayer acquires property with an intention to trade – that is, to resell the property at profit – any gain from the trade is business income. In most characterization cases involving a claim for the principal residence exemption, the taxpayer’s intention is the central issue.
With hot real estate markets across Canada over the past two decades, the Canadian tax authorities have been active in auditing and assessing “house flippers.” The tax authorities’ focus is to ensure that taxpayers who repeatedly buy homes with the intention of moving in for a short period prior to resale for profit are not improperly sheltering business profits with the principal residence exemption. As a result of these audits, a body of “house flipper” caselaw has developed. In this case, the QCA accepted the taxpayer’s claim that he bought the homes for personal use, not for “flipping”.
In April 2008, after his divorce, Mr. Bishara purchased an apartment (the “first residence”) to live in with his girlfriend and her two young children. Only after a year of living in the first residence, Mr. Bishara sold it and purchased a larger apartment (the “second residence”) to accommodate the needs of the growing children. However, shortly after taking possession of the second residence, Mr. Bishara’s girlfriend broke up with him unexpectedly. Thereafter, Mr. Bishara remained alone in the second residence, which was too big for himself, until December 2010, when he bought and moved into a one-bedroom loft (the “third residence”). After a short while, he reconciled with his ex-wife, sold the second and the third residences in March 2011 and May 2011 respectively, and moved back with his ex-wife.
The takeaways from this decision are twofold:
- First, this case demonstrates that an appellate court may reverse the judgment of a lower court to conclude that gains realized on the sale of several properties, although in quick succession, are capital gains where the taxpayer is able to: (1) provide coherent explanations for his moves; and (2) show that he had no intention at the time of acquiring the properties to make a short term profit. In rendering judgment, the QCA stressed that the trial judge was required to consider the evidence and submissions before him – including the taxpayer’s testimony — and explain his reasons for giving “no weight” to certain evidence.
- Second, this decision highlights the importance for taxpayers of keeping adequate records to corroborate their intentions when purchasing real estate.