CRA Audit Alert: You Flipped a Home — Now What?

If you've recently received a letter from the Canada Revenue Agency (CRA) about a real estate audit, you're not alone. The CRA has been aggressively targeting individuals who buy, renovate or rebuild properties, and then sell them — often without charging HST or properly reporting the income.

At Prasad & Company LLP, we're seeing a sharp rise in audits involving people who tear down old homes, build new ones, and sell them as if they were “used” residential properties. These situations often result in significant reassessments, including HST liabilities, penalties, and full taxation of the profit as business income.

If this sounds like your situation, here’s what you need to know — and how we can help protect your financial position.

Why the CRA Is Auditing You

If you bought an old home, tore it down, built a new house, and sold it, CRA likely considers you a builder under the Excise Tax Act. That means:

• HST should have been charged on the sale, even if you believed it was a used home.
• Your profit may be taxed as business income (fully taxable), not as a capital gain (50% taxable).
• The principal residence exemption (PRE) may be denied if CRA believes you never intended to live there long-term.

CRA may reassess both your HST obligations and your personal income tax returns, adding interest and penalties on top of the taxes owing.

What You Can Do Now to Minimize the Damage

1. Don’t Ignore the CRA Audit Letter

Responding promptly is key — but don’t go it alone. CRA’s letters often contain intimidating language, and any information you provide may influence the audit outcome.

We can communicate directly with CRA on your behalf, managing the flow of information and positioning your case effectively.

2. Gather and Organize Your Records

You’ll need to produce documents related to:

• Property acquisition and sale
• Construction invoices and permits
• Occupancy (even temporary)
• Financing and transaction history
• Intent behind the purchase

We help assemble and analyze your documents to prepare a defensible response strategy.

HST Consequences: You May Owe Tax You Never Charged

If the home was newly built or substantially renovated (90%+ rebuilt), the CRA may argue that:

• HST applied to the sale, even if you didn’t charge it.
• You now owe HST out-of-pocket, calculated on the gross sale price.
• You may have missed your opportunity to claim input tax credits for materials and contractor costs.

We assess whether HST truly applies, whether self-assessment rules were triggered, and whether any rebates or credits can offset the damage.

Don’t Overlook the Personal Tax Consequences

The CRA often digs deeper once a real estate transaction is under audit. Here's what they may look at:

Business Income vs. Capital Gains

• If your intent was to flip for profit, CRA will likely tax the gain as business income, fully taxable at your personal rate.
• Even if you claimed the principal residence exemption, CRA may deny it if you didn’t live there long enough — or at all.

Reopening Past Tax Years

• CRA can reassess up to 3 years, or longer in cases of negligence or misrepresentation.
• If you’ve done multiple flips or omitted income, they may look at prior or future years and related parties.

Penalties and Interest

• CRA may apply:
  • Gross negligence penalties (up to 50% of tax owing)
  • Daily interest charges dating back to the transaction
  • Loss of PRE access in future years

We help you quantify the exposure, develop a response strategy, and negotiate to reduce penalties where possible.

Can You Make a Voluntary Disclosure?

If this isn’t your first flip — or if other unreported transactions exist — you may qualify for the CRA’s Voluntary Disclosures Program (VDP). Coming forward before CRA finds the issue can reduce or eliminate penalties and protect you from prosecution.

We can determine if VDP is still an option, prepare a clean disclosure package, and guide you through the process.

Future Scrutiny: Once Flagged, Always Flagged

A real estate audit can result in long-term CRA monitoring, especially if they view you as a habitual flipper. This can impact:

• Your future real estate transactions
• Your business filings
• Your spouse’s or family’s returns
• Potential trust or corporate entities

We help you restructure future transactions to reduce risk and protect your family’s broader tax situation.

How We Can Help

At Prasad & Company LLP, we have extensive experience dealing with:

• CRA real estate and HST audits
• Principal residence exemption challenges
• Business income recharacterizations
• Voluntary disclosures
• Post-audit restructuring and planning

We’ll represent you throughout the audit, respond to CRA requests, challenge aggressive reassessments, and build a forward-looking tax strategy so this doesn’t happen again.

Get Ahead of the Audit — Before It Gets Ahead of You

If you’ve flipped a property and are now being audited, the worst thing you can do is delay. The earlier you act, the more options you have.

Contact us today to schedule a confidential consultation. We’ll assess your position, manage the audit process, and work to minimize the financial fallout — so you can move forward with confidence.