For the first time in almost three years, the Bank of Canada has cut its minimum mortgage qualifying rate, dropping it to 5.19 per cent from 5.34 per cent.

The central bank’s new rate has a slight effect on the mortgage stress test for those with uninsured mortgages.

“At a minimum, the qualifying rate for all uninsured mortgages should be the greater of the contractual mortgage rate plus two per cent or the five-year benchmark rate published by the Bank of Canada,” states OSFI’s Residential Mortgage Underwriting Practices and Procedures guideline.

Whichever rate is higher is the one that borrowers are tested at. As a result, at least for the time being, it will be slightly easier for those with uninsured mortgages to qualify. This also applies to those who want to switch lenders.

According to calculations by RateSpy.com, assuming no other debts and a 30-year amortization period, someone earning $50,000 a year and making a 20 per cent down payment would be able to afford a home that is roughly $4,000 more expensive. Someone earning $100,000 a year and making the same down payment would be able to afford a home that is roughly $8,300 more expensive.

“This decrease alleviates some of the pressure on first-time homebuyers, who are the most financially strained Canadians entering the housing market,” said James Laird, co-founder of RateHub Inc. and president of CanWise Financial.

The Bank of Canada determines the conventional five-year mortgage rate using Office of the Superintendent of Financial Institutions (OSFI) data on the posted five-year rates for the six largest banks. OSFI on July 15 released the May data.

New home sales in Canada edged up 0.3 per cent in June from the previous month, with gains in the Greater Toronto Area and Montreal offsetting declines in B.C. The incremental gains mark a new period of stability for housing sales after a less-than-stellar 2018 and early 2019, according to the Canadian Real Estate Association’s monthly report.

While seasonally adjusted sales actually fell 0.2 per cent, they remain slightly above year-ago levels.

“The big story here is that sales and prices are essentially flat on a national basis, the market is close to overall balance, and sales activity is almost right on top of its 10-year average,” said Douglas Porter, BMO chief economist. “In other words, the Canadian housing market is now actually kind of boring, which is likely exactly what policymakers would like to see.”

The national average sale price was up 1.7 per cent on a year-over-year basis, coming in at just under $505,500. This figure is heavily skewed by the GTA and GVA markets: removing them would cut the price by $106,000.

On a month-to-month basis, new listings rose by 0.8 per cent.

One thing that hasn’t changed is the increasing deviation between the eastern and western markets in the country.

“While sales activity in Canada’s three westernmost provinces appears to have stopped deteriorating, it will be some time before supply and demand there becomes better balanced and the outlook for home prices improves,” said Gregory Klump, CREA’s chief economist in a press release.

More than 80 per cent of all local markets were in balanced market territory in June, the largest share in three years. The inventory of unsold homes dipped to 5.0 months, the lowest in a year and a half.

“We judge that the overall national market is more likely to strengthen modestly over the next 18 months, and are looking for sales and prices to both rise roughly 2 per cent in 2020,” said Porter. “Maybe not a moonshot, but not a bleak landscape either.”

If you plan on selling a home or condo that you bought fairly recently, especially if you never actually moved into it, be wary as the tax man will be carefully watching how you report any gain on your tax return, lest it be seen as a “flip” and be fully taxable as income, rather than a half-taxable capital gain.

The Canada Revenue Agency’s ability to hunt you down over your real estate transactions has improved thanks to the recent $50-million boost in funding over five years announced in the 2019 federal budget to help “address tax non-compliance in real estate transactions.” The CRA uses advanced risk assessment tools, analytics and third-party data to detect and “take action” whenever it finds real estate transactions where the parties have failed to pay the required taxes. Specifically, the CRA is focusing on ensuring that taxpayers report all sales of their principal residence on their tax returns, properly report any capital gain derived from a real estate sale where the principal residence tax exemption does not apply, and report money made on real estate “flipping” as 100 per cent taxable income.

But what, exactly, constitutes a real estate flip? That was the subject of a recent Tax Court of Canada decision, released this week.

The case involved a transit operator for the Toronto Transit Commission who, along with his brother, bought and moved into a two-story, three-bedroom townhouse in Vaughan, Ontario, in 1999. His brother contributed toward the initial down payment, lived with him and together they equally shared all household expenses, including the mortgage payments. In 2003, the taxpayer’s brother met the woman who would become his future wife, whom he married in April 2007. She moved into the townhouse and they had a child together in February 2008.

Sometime prior to this, the taxpayer and his brother began discussing going their separate ways. The taxpayer testified that he wanted to sell the townhouse and move to a place that was smaller and closer to work. Indeed, in 2006 he found a smaller place, a two-bedroom condo, which was in the pre-construction phase. The tentative occupancy date of the condo was April 2008, but that date was pushed back several times, ultimately to 2010.

Prior to taking possession of the condo, however, circumstances changed. In December 2008, the brothers’ father passed away while in Jamaica, where he lived together with their mother for about six months each year. Following their father’s death, their mother did not feel safe living alone in Jamaica and in March 2009 she moved into her sons’ townhouse. The taxpayer testified that his brother and his family shared the master bedroom, while the taxpayer and their mother each occupied one of the remaining two bedrooms. This living situation didn’t last long and the taxpayer refinanced the mortgage on the townhouse in order to buy out his brother’s share of the property, enabling him and his family to move out.

In August 2010, the taxpayer took possession of the condo and immediately arranged to list it for sale, realizing that it would be too small for both he and his mother. No one lived in the condo in the interim. He sold it in October 2010 resulting in a net gain of $13,412, which the taxpayer reported as a capital gain, taxable at 50 per cent, on his 2010 tax return. The CRA reassessed him, finding that the $13,412 should have been reported as fully taxable income and slapped him with gross negligence penalties.

The common question of whether a gain from the sale of real estate is on account of income or on account of capital always comes down to the underlying facts. The courts will look to the surrounding circumstances and, perhaps most importantly, the taxpayer’s intention.

The judge reviewed the facts in light of the four factors previously enumerated by the Supreme Court of Canada by which these types of cases are decided: the taxpayer’s intention, whether the taxpayer was engaged in any way in the real estate industry, the nature and use of the property sold and the extent to which the property was financed.

The taxpayer testified that he purchased the condo with the full intention of living in it after his brother moved out of their shared townhouse; however, when his father died and his mother wished to return to Canada to live full-time, the taxpayer “changed his plans to move so that his mother could live with him at (the townhouse), which was a larger space.” He testified that since he could not afford to own both homes, he listed and sold the condo shortly after assuming title. As he testified, if not for his father’s death and his mother’s return to Canada, he would have carried out his plan to sell the townhouse and live in the condo as his primary residence.

The judge concluded that the taxpayer’s intention with respect to the condo was indeed to live in it as his primary residence. He had no secondary intention of putting the condo up for resale at the time of purchase.

The judge therefore concluded that the sale of the condo was properly reported as a capital gain and ordered the CRA to reassess on that basis and cancel the gross negligence penalties.

One final note is warranted: while justice was ultimately done and the taxpayer prevailed, it actually took him nine years and three separate visits to court to get relief. The CRA originally reassessed his 2010 capital gain as income back in 2014. The taxpayer filed a Notice of Objection to oppose the reassessment, which was reconfirmed by the CRA in January 2016. The taxpayer then had 90 days to appeal the CRA’s reassessment to the Tax Court. For a variety of reasons, he missed that deadline and ended up in Tax Court seeking an extension of the deadline to file an appeal. The Tax Court denied his request for an extension. He then went to the Federal Court of Appeal which, in June 2017, reversed the lower court’s decision and allowed an extension of time to appeal to Tax Court, which heard the case in March 2019 and released its decision this week.