I have a client that wanted to sell his primary residence last year. He took a $20,000 deposit to secure the deal. Unfortunately the buyer wasn’t able to complete the deal. My client was able to keep the deposit because the buyer defaulted. I’ve never run into this before. What is the correct tax treatment for the deposit he was able to keep?
Forfeited deposits
1.8 Cancellation of a contract constitutes a disposition of a taxpayer’s rights under that contract pursuant to subparagraph (b)(ii) of the definition of disposition in subsection 248(1). This means that a taxpayer entitled to retain a deposit upon the cancellation of a contract may realize a capital gain on the forfeiture where the taxpayer’s rights under the contract are capital in nature. However, if the rights disposed of under the contract are of an income nature, the amount forfeited will be ordinary income to the taxpayer.
From Income Tax Folio S3-F9-C1, Lottery Winnings, Miscellaneous Receipts, and Income (and Losses) from Crime
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