Three Pre-Construction Losses, Two Kinds of Deduction

The situation

Ji-ho worked full-time as a paramedic. Arjun taught at an elementary school. Between shifts and school terms, starting in early 2021, the two of them began buying pre-construction assignment contracts — the right to purchase a home before it is built, with the intention of selling that right to another buyer before the building closes, rather than ever taking possession themselves. Ottawa's new-build market was moving quickly that year, and the plan was straightforward: put down a deposit on a unit, wait for the project to sell out and prices on comparable units to climb, then sell the contract itself for a profit before the final closing date arrived.

Over about eighteen months they entered three such contracts. Two were bought and held in both their names. The third was a joint venture with Kavya, a friend from Arjun's teacher's college cohort, who put up half the deposit on a larger townhome unit in exchange for half of whatever the assignment eventually sold for. All three were financed as short-term deals — none of them arranged a mortgage, since none of them intended to close on the units and actually own them.

The plan worked in reverse. By the time each assignment came up for resale, the market had cooled, comparable units were selling for less than the couple had contracted to pay, and all three positions closed out at a loss rather than a profit. Combined, the three assignments lost roughly $135,000: about $60,000 on the first, $50,000 on the second, and $50,000 on the joint venture with Kavya, of which Ji-ho and Arjun's half share came to $25,000. On their tax returns, they claimed the full $135,000 as a business loss — fully deductible against their combined employment income as a paramedic and a teacher — rather than as a capital loss, which in Canada is only half deductible and only against capital gains. That treatment produced a combined tax refund of roughly $45,000 across their two returns.

What the reassessment claimed

About a year after they filed, the Canada Revenue Agency opened an audit of the claim. The distinction the CRA was testing is one of the oldest and most fact-dependent lines in Canadian income tax law: whether a transaction is an adventure in the nature of trade — treated for tax purposes as a business, with fully deductible losses — or simply an investment that happened not to work out, treated as a capital transaction with only half the loss deductible, and only against capital gains. There is no bright-line test. The CRA and the courts look at a cluster of factors: the taxpayer's intention at the time of purchase, whether they have a history of similar transactions, how the deal was financed, how quickly it was resold, and whether there was ever a genuine intention to live in or hold the property.

The auditor's position was that none of the three transactions qualified as a business. Ji-ho and Arjun had full-time jobs unrelated to real estate, had never done anything like this before, and — in the auditor's view — three transactions over eighteen months, while suggestive, was not enough on its own to establish a pattern of trade rather than a series of unlucky investments. More damaging was an email thread the auditor's document request turned up: partway through the joint venture with Kavya, when the resale market softened and a quick assignment sale looked unlikely, the three of them had discussed the possibility of Kavya's parents moving into the finished unit instead of reselling it, as a fallback. The CRA treated that discussion as evidence that the joint-venture property, at least, had never been purchased purely to flip — undercutting the whole basis for calling it a business transaction.

The reassessment recharacterized all $135,000 in losses as capital losses. Since capital losses are only half deductible, and only against capital gains, and the couple had no capital gains that year to absorb them, the entire deduction was disallowed for the year claimed — carried forward instead, with no immediate value. The CRA demanded repayment of the full $45,000 refund, plus arrears interest of roughly $9,000 that had accrued since the original refund was issued, for a total reassessment of about $54,000.

What we did

1. Filed a notice of objection within the deadline. A reassessment can be formally disputed through the CRA's objection process, but only within a strict window after the notice is issued. We filed promptly, which preserved the couple's right to challenge the reassessment and paused collection on the disputed amount while the objection was under review.
2. Separated the three properties instead of arguing them as one block. The CRA's reassessment treated all three assignments as a single transaction pattern, but each had its own facts. We built three separate files — one for each property — rather than one combined argument, since the strongest case for two of them did not depend on the weakest facts of the third.
3. Documented the trade pattern on the two cleaner properties. For the first two assignments, we assembled the listing agreements the couple had signed with a real estate agent at the time of purchase, deposit financing structured for short-term resale rather than a mortgage commitment, and messages showing both units were marketed for reassignment within weeks of the original purchase — before either resale market had even begun to soften. Neither property was ever discussed for personal use.
4. Conceded the weaker facts on the joint-venture property rather than contesting them. The email thread about Kavya's parents potentially moving in was real, and no amount of argument was going to make it disappear. Rather than spend the objection fighting a losing point, we treated that property differently from the start and focused the CRA's attention on what distinguished it.
5. Made the business-loss case turn on financing and marketing, not just repetition. Three transactions alone rarely settles an adventure-in-the-nature-of-trade question, so we leaned on the structural evidence: short-term deposit financing with no mortgage application ever submitted, immediate listing for resale, and — for the first two properties only — no discussion of personal use at any point in the file.
6. Negotiated a split resolution with the CRA appeals officer. Once the objection reached the appeals stage, we proposed treating the two well-documented properties as business losses and the joint-venture property as a capital loss, rather than pushing for an all-or-nothing ruling that risked losing everything if the joint-venture facts pulled the whole case down with it.

The outcome

The CRA agreed to the split. The first two assignments, together accounting for $110,000 of the combined loss, were accepted as business losses, preserving roughly $37,000 of the original $45,000 refund and eliminating the interest charged on that portion. The joint-venture property with Kavya was confirmed as a capital loss: the $25,000 loss on Ji-ho and Arjun's half share is only half deductible, worth about $12,500 in deductible loss, and since they had no capital gains that year to offset, it could not be used immediately. It was carried forward instead, available to reduce tax on a future capital gain whenever one arises. On the tax already refunded and now attributable to that property, the couple repaid roughly $8,000, plus about $2,000 in interest that had accrued specifically on that portion — a total repayment of roughly $10,000, against an original CRA demand of $54,000.

The compromise cost something real on both sides. The CRA gave up most of its reassessment, accepting business-loss treatment for two-thirds of the claimed losses on facts that, on their own, would not have been overwhelming without the joint-venture property's weaker facts to compare them against. Ji-ho and Arjun gave up the immediate tax benefit of the joint-venture loss, plus a modest repayment with interest, and they now hold a capital loss carryforward that only has value once they eventually realize a capital gain elsewhere — which could be years away, or might never happen if they never sell an appreciated capital property again. Neither side got everything it argued for, but both avoided a Tax Court appeal, where the outcome on all three properties would have been decided by a judge applying the same uncertain multi-factor test, with legal costs on both sides likely exceeding what remained in dispute by the time the file reached the appeals officer.

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