What is a "flipped property"?
A "flipped property" is a property that is located in Canada, would not otherwise be inventory of the taxpayer, and
was owned by the taxpayer for less than 365 consecutive days prior to being sold.
A "flipped property" is a property that is located in Canada, would not otherwise be inventory of the taxpayer, and
was owned by the taxpayer for less than 365 consecutive days prior to being sold.
How are gains or profits on residential property usually taxed?
When an individual sells a residential property, then any gains or profits are classified as either:
- fully taxable business income (100% taxable) or
- a capital gain (50% taxable)
However, if the property qualifies as a principal residence, then by claiming the principal residence exemption, the taxable portion can be reduced or eliminated altogether, depending on the situation.
What are the new rules?
Essentially, the new rules classify profits taken from a flipped residential property as business income, meaning gains or profits are fully taxable. There is no principal residence exemption available to reduce the tax. Also, the new rule only applies to gains; losses on sale cannot be reported or deducted from income just because the property meets the definition of a flipped property.
Essentially, the new rules classify profits taken from a flipped residential property as business income, meaning gains or profits are fully taxable. There is no principal residence exemption available to reduce the tax. Also, the new rule only applies to gains; losses on sale cannot be reported or deducted from income just because the property meets the definition of a flipped property.
What are the exceptions?
The new rules do not apply when the property is being sold because of one of the following reasons:
The new rules do not apply when the property is being sold because of one of the following reasons:
- death of the taxpayer or their relative
- new family member taken in (birth of child, adoption, or care of elderly parent)
- the taxpayer is moving to join a related person’s household
- breakdown of a marriage or a common-law partnership (if living apart for at least 90 days prior to the disposition)
- threat to the personal safety of the taxpayer or a related person
- disability or serious illness of the taxpayer or a related person
- “eligible relocation” of the taxpayer or their spouse or common-law partner (e.g., a work relocation where the new home is at least 40 km closer to the new work location)
- involuntary termination of employment of the taxpayer or the taxpayer’s spouse or common-law partner
- insolvency of the taxpayer
- destruction or expropriation of the property against the taxpayer’s will (e.g., due to a natural or human-made disaster).
Although not currently included in the new rules, there is a proposal to extend this new "anti-flipping" rule to profits made from assignment sales. This would affect individuals who hold the rights to a pre-construction residential property and then sell those rights for a gain within 12 months.
Apart from "flipped properties," how does the CRA determine whether to classify residential real estate profits as business income or capital gains?
The CRA and Canadian court system typically take the following into account when determining how to classify the profits earned on a residential real estate sale:
What about GST/HST?
Regardless of how the gains on a property are taxed, a taxpayer who sells a property may be required to charge GST/HST on the sale, depending on the actual use of the property during the time between the original purchase and sale. Builders (as defined in the Excise Tax Act) are also required to charge GST/HST on the sale of residential property. Assignment sales are also subject to GST/HST, regardless of why the property was purchased.
The CRA and Canadian court system typically take the following into account when determining how to classify the profits earned on a residential real estate sale:
- the taxpayer’s intention for the property at the time of purchase
- whether or not the individual's business or occupation is related to real estate
- how much borrowed money was used to finance the property, and the terms of the loan
- how long the property was held
- the factors motivating the sale
- any other pertinent details
What about GST/HST?
Regardless of how the gains on a property are taxed, a taxpayer who sells a property may be required to charge GST/HST on the sale, depending on the actual use of the property during the time between the original purchase and sale. Builders (as defined in the Excise Tax Act) are also required to charge GST/HST on the sale of residential property. Assignment sales are also subject to GST/HST, regardless of why the property was purchased.
Now what?
Tax rules on the disposition of real estate are complex. For situation-specific advice, reach out to your lawyer or tax advisor.
