CRA Real Estate Audits: Capital Gains vs. Business Income, House Flipping, Rental Reassessments, GST/QST Issues, and Enforcement — A Montreal CPA Firm Guide

Real estate is one of CRA’s highest audit priorities in Canada.
Whether you sold a property, flipped a home, assigned a pre-sale contract, refinanced repeatedly, or earned rental income, CRA may audit to determine whether:
• your gain is capital (50 percent taxed)
• your gain is business income (100 percent taxed)
• GST/QST applies
• you incorrectly claimed rental expenses
• you improperly claimed the principal residence exemption
• you need to report house flipping income
• you participated in “adventure in the nature of trade”

These audits can create massive reassessments, penalties, and interest, especially in Quebec’s active real estate market.
This guide explains how CRA audits real estate, why certain taxpayers are targeted, and how Mackisen defends against real estate reassessments and enforcement.

Legal and Regulatory Framework

CRA’s authority to audit real estate transactions comes from:
• the Income Tax Act
• the Excise Tax Act
• the Quebec Sales Tax Act
• the Housing Rebate Regulations
• real estate transaction reporting requirements

CRA may:
• reclassify a sale as business income
• deny the principal residence exemption
• deny rental expenses
• impose GST/QST on sales or assignments
• reassess multiple years
• charge gross negligence penalties
• refer files for investigation
• send files to Collections for enforcement

Real estate audits are complex and highly fact-dependent.

Key Court Decisions

Courts consistently affirm CRA’s authority in real estate reclassification. Important principles include:
• frequent buying and selling can be considered business activity
• intent at purchase is critical
• property used for flipping is not a principal residence
• GST/QST applies to new or substantially renovated homes
• assignments may trigger GST/HST
• renovations for resale indicate business income
• claiming capital gains without evidence weakens the taxpayer’s case
• undocumented rental expenses are denied
• lifestyle vs income discrepancies raise suspicion

CRA often wins real estate audit cases unless documentation is strong.

Why CRA Targets Real Estate

CRA selects real estate files when certain indicators appear:
• multiple transactions in short periods
• buying, renovating, and reselling homes
• assignment sales
• claiming principal residence exemption repeatedly
• refinancing used as disguised income
• rental losses for many years
• undocumented home office expenses
• short-term rentals (Airbnb)
• real estate used as business inventory
• unreported GST/QST on sales
• bank deposits inconsistent with declared rental income

Quebec has the highest audit intensity for real estate due to data sharing between land registries, notaries, and Revenu Québec.

How CRA Audits Real Estate (Deep Expansion)

1. Property Sale Reclassification

CRA may reclassify your gain as:
• business income (100 percent taxable)
instead of
• capital gain (50 percent taxable)

CRA examines:
• intent at purchase
• financing structure
• frequency of transactions
• renovation patterns
• length of ownership
• marketing behaviour
• use of realtors
• discussions with contractors
• flips disguised as residences

2. Principal Residence Exemption Denial

CRA may deny PRE when:
• property was not ordinarily inhabited
• property was used for flipping
• multiple PRE claims occurred
• inadequate documentation exists
• inconsistent address records appear
• roommates or tenants occupied part of the property

3. Rental Income & Expense Audit

CRA reviews:
• rent collected
• bank deposits
• mortgage interest allocations
• depreciation (CCA)
• repairs vs improvements
• undocumented expenses
• mixed-use properties
• Airbnb income

Disallowed expenses lead to reassessments.

4. GST/QST Real Estate Audits

GST/QST may apply to:
• new homes
• substantially renovated homes
• assignment sales
• commercial conversions
• short-term rentals
• “builder” classification

CRA may reassess GST/QST even if you believed it was not applicable.

5. Real Estate Net Worth Method

CRA may use indirect methods such as:
• net-worth analysis
• lifestyle audits
• bank deposit analysis

This is common when records are incomplete.

6. Enforcement After Reassessment

CRA may rapidly escalate to:
• refund seizure
• bank freezes
• wage garnishments
• Federal Court certificates
• liens on property
• receivable seizures

Real estate reassessments are often large enough to trigger immediate enforcement.

Immediate Financial Risks

Real estate reassessments often lead to:
• tens or hundreds of thousands in unexpected tax
• denied PRE
• GST/QST reassessments
• penalties up to 50 percent
• daily interest compounding
• collections and enforcement
• refinancing difficulties
• legal disputes with partners
• delays in property sales
• liens registered on title
• blocked financing

Many real estate investors face financial collapse after CRA reassessments.

Mackisen Strategy

Real estate audits require a specialized defence approach. Mackisen CPA uses a multi-layered strategy involving financial reconstruction, legal argumentation, and CRA negotiation.

Step 1 — Transaction Review

We analyze:
• purchase agreements
• sale agreements
• renovation invoices
• mortgage files
• communications with contractors
• real estate listings
• intent indicators
• use of property
• residency patterns
• rent ledgers
• GST/QST filings

This determines CRA’s basis for reassessment.

Step 2 — Evidence Reconstruction

We compile:
• residency documentation
• bank records
• renovation timelines
• lease agreements
• proof of long-term use
• photos and utility bills
• property tax records
• financing details
• contracts and invoices

This supports principal residence or capital gain status.

Step 3 — GST/QST Defence

We prepare arguments for:
• whether you are a “builder”
• whether the home is “substantially renovated”
• whether an assignment is taxable
• whether the sale qualifies as exempt
• whether GST/QST calculations were incorrect

Small errors in classification can have huge tax impacts.

Step 4 — Filing Objections

We prepare detailed objections including:
• legal precedents
• CRA policy challenges
• fact-based analysis
• alternative tax treatment
• corrected calculations

Most real estate reassessments can be reduced significantly.

Step 5 — Stop Enforcement

We negotiate to:
• pause collections
• lift bank freezes
• prevent liens
• secure time extensions
• create payment plans

This protects taxpayers from financial damage.

Step 6 — Long-Term Real Estate Tax Planning

We help structure future transactions:
• flipping structure
• rental portfolio planning
• GST/QST compliance
• holding company structures
• capital vs business treatment strategy

This prevents future audits.

Real Client Experience

A Montreal investor bought, renovated, and sold a duplex. CRA reclassified the gain as business income and assessed GST/QST. Mackisen reconstructed the timeline, proved long-term intent, and reversed the business income classification and GST assessment.

Another client, a first-time buyer, had their principal residence exemption denied because CRA believed they flipped the property. Mackisen provided proof of occupancy—utility bills, school registrations, tenant records—and CRA withdrew the reassessment.

Common Questions

• Can CRA treat my home sale as business income? Yes.
• Can CRA deny my principal residence exemption? Yes.
• Do I owe GST/QST on a flip? Possibly.
• Are rental losses always audited? Frequently.
• Can CRA audit real estate from 5–10 years ago? Yes.
• Can CRA lien my house? Yes, after reassessment.
• Can CRA seize future refunds from real estate reassessment? Yes.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps businesses stay compliant while recovering the taxes they’re entitled to. Whether you’re filing your first GST/QST return or optimizing multi-year refunds, our expert team ensures precision, transparency, and protection from audit risk.