Tax real estate income versus capital

Condo sale: business income or capital gain?

July 27, 2017 | by George Evans
business income

In Feizmohammadi v. The Queen, 2017 TCC 28 the Tax Court of Canada held that the taxpayer’s condominium sale constituted income from a business. Tax Foresight correctly predicts the outcome of the Feizmohammadi case with 91% confidence.

How consistent was this decision with prior decisions? Our Tax Foresight analysis of the case follows.

In 2010, Feizmohammadi purchased a 560-square foot condominium. Less than two months after the closing, the taxpayer listed and resold the property. The triggering event occurred when the taxpayer omitted the condo’s disposition from his 2010 income tax return. The Minister assessed the disposition as business income. The taxpayer appealed.

The main issue before the Court was whether the taxpayer’s family “ordinarily inhabited” the condo as their “principal residence”, within the meaning of subsection 54(a) of ITA, during the year in question.

In support of his appeal, the taxpayer explained that the condo’s periodic vacancy was due to overseas travel. He also argued that his motivation for resale stemmed from the desire for more living space to accommodate additional family members.

The Court, however, was troubled by Feizmohammadi's claims as there were several pieces of evidence that suggested the family had never actually moved into the condo. A questionnaire completed by the taxpayer, at the time of resale, indicated that he and his family did not reside in the condo, and instead tenants occupied the unit. Furthermore, the taxpayer’s hydro bills revealed either no electricity had been consumed at the condo or that someone else was being billed during the relevant time period.

This case highlights the importance of establishing ordinary inhabitance, and the types of evidence that will be considered, when excluding residential sales from business income.

Tax Foresight Case Analysis
  • Tax Foresight correctly predicts the outcome of the Feizmohammadi case with 91% confidence.
  • If the taxpayer had actually moved into the condo for any period of time, Tax Foresight predicts income from a business with 78% confidence.
  • If the taxpayer also demonstrated that he intended to hold the property for more than 5 years at the time of purchase, Tax Foresight predicts the condo's resale would have constituted a capital gain, with 95% confidence.
Real Estate Insights
  • 65% of cases on the issue of real estate sales have resulted in a finding of income from a business.
  • Where the taxpayer demonstrates an intention to hold the property for less than 1 year at the time of purchase, the residential sale constitutes income from a business 89% of the time.
  • In 88% of capital gain cases, the taxpayer intended to hold the property for more than 5 years at the time of purchase.
  • Each time you run our Real Estate Classifier you apply the entire body of case law to your client's situation.
  • Want to make sure you are considering all the new real estate classifier cases when you give your advice? Tax Foresight reflects the newest case law and takes every case into account when providing its prediction.


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