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Q. Three friends and I pooled our money ($100,000 total) two years ago as a down payment to buy a rental condo in Toronto. All four of our names are on title. We flipped the condo this past May for a total profit of $120,000 after expenses. That’s a $30,000 capital gain for each of us, which is pretty good.
This is where it gets tricky: I plan to declare the capital gains from the condo sale on my taxes for 2019, but a couple of my friends say they aren’t going to—mainly because they don’t think it’s a huge amount of money and they believe they likely won’t get caught. I also declared my share of the net rental profit for 2017 and 2018—but at that time, two of my friends did not. What happens if the Canada Revenue Agency (CRA) audits one of us? Will I have to pay their share of the capital gains taxes and penalties on the sale of that condo? What can I do now to make sure that doesn’t happen? –Marcus
A. Hey Marcus, you did well on your rental property! However, your partners may not fare as well.
When you have a rental property you’re required to:
- Claim the rental income on your income tax return.
- Complete this form when you sell the property.
- Claim the capital gain on your income tax return.
If you fail to report the income or capital gain, you may face interest charges on the amount of tax owing, plus penalties that may be larger than the interest owing on the tax. In addition, if you knowingly falsify or omit information on your return for more than one tax year, which your friends have done, the penalties increase.
I’m assuming you each put in $25,000 and have 25% ownership in the property. You’ve been claiming 25% of the rental income over the length of time you owned the property on your return, so you should be okay. The partners that didn’t claim the income may face penalties and interest charges on the tax owing if they are caught.
There may have been a time before the commonplace use of computers when your friends could have gotten away with their plan of omission, but today CRA has easy access to information. When the property was sold, the sale was registered at the provincial registry office, which CRA has access to. It is not worth the risk of getting caught.
Your friends may be thinking they’re in the clear because you claimed the rental income two years in a row, and they weren’t reassessed. CRA normally has three years to reassess a tax return after the initial assessment; however, if they believe someone knowingly falsified or omitted information they can go back further.