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Here is a hypothetical scenario I was discussing with someone today that I think seems fishy, but I can't find much info on.

  1. An adult gives money to his 20 year old kid to buy a house as a gift.
  2. The kid lives in it, renovates it, and flips it in say half a year and pays 0 taxes due to the Principal Residence rule.
  3. The kid gives back the money plus the profit to the adult as a gift.

Essentially the adult is using the kid to take advantage of the principal residence tax free capital gains rule to invest and sell property.

Is this legal? If it is, it seems like this loophole could be used to avoid taxes for multiple years until the kid himself can afford a principal residence (and hence this loophole is no longer available).

guest12345
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1 Answers1

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Anyone considering this approach needs to talk to a lawyer before going ahead; certainly, you don't want to trust anything I say as legal advice as I have no legal training.

This is not a gift. All the CRA has to show is that there was a reasonable expectation that the property would be sold and the money returned to the parent. That's obviously the case here; in your timeline, the evidence is in the two bank accounts after approximately six months. As to whether you'd get away with tax fraud of this nature, that depends on how careful the CRA is willing to investigate.

There's another risk, too. Canada's at risk of a market correction on real-estate prices, where prices might drop 20-40%, or worse if you are pessimistic. That's speculation, of course, but such corrections are common-place over the long-term. If you buy a house today with the expectation of improving it and flipping it in six months, you run a very real risk of not recovering your initial investment, let alone the time and materials invested. Heck, you might not be able to sell the house at all. And from the parent's point of view, there's nothing to be done. They can't claim this was a gift, and now claim any sort of obligation whatsoever. The child isn't obligated to sell at a loss, and may not be able to sell in any case.

ChrisInEdmonton
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