Flip or Flop: Navigating the New Income Tax Act rules regarding Real Estate “Flipping”

Beginning as a highlight in the 2022 Canadian Budget, the federal government has made a concerted effort to ensure that profits made from “flipping properties” (i.e purchasing a property with the intent or effect to resell the property for a profit) are taxed in a full and fair manner. 

As defined in Section 13 of the Income Tax Act, flipped property means a “housing unit of a taxpayer … located in Canada that was owned by the taxpayer for less than 365 consecutive days prior to the disposition of the property”.

As of January 1, 2023, the Income Tax Act has been amended to create new rules with respect to the sale of residential properties which are considered flipped.

You now must own the residential property for more than 365 consecutive days before disposition in order to claim the principle residence capital gains exception or capital gains treatment in respect to residential properties.

The consequence of purchasing residential property and selling it prior to the prescribed 365 day period will deem you to be carrying on a business that is “an adventure or concern in the nature of trade with respect to flipped property”. This will result in the principle residence capital gains exception not applying and the sale of the property being taxed as “business income”.  Additionally, any loss from a business in respect of a flipped property is deemed to be nil.

Section 13 does provide for some exceptions when a disposition can reasonably be considered to occur due to, or in anticipation of, one or more of the following events:

(a) the death of the taxpayer or a person related to the taxpayer;

(b) one or more persons related to the taxpayer becoming a member of the taxpayer’s household or the taxpayer becoming a member of the household of a related person;

(c) the breakdown of the marriage or common-law partnership of the taxpayer if the taxpayer has been living separate and apart from their spouse or common-law partner for at least 90 days prior to the disposition;

(d) a threat to the personal safety of the taxpayer or a related person;

(e) the taxpayer or a related person suffering from a serious illness or disability;

(f) an eligible relocation of the taxpayer or the taxpayer’s spouse or common-law partner;

(g) an involuntary termination of the employment of the taxpayer or the taxpayer’s spouse or common-law partner;

(h) the insolvency of the taxpayer; or

(i) the destruction or expropriation of the property.

With these new changes in place, it is important to talk with your lawyer and accounting professionals about your intentions with property you plan to buy or sell as there could be significant tax consequences, with very little planning opportunities available if you have already committed to a formal sale agreement.

Our team here at SNJ would be happy to help answer any questions you may have if you require further assistance.