A Canadian Tax Lawyer Explains The Residential Property Flipping Rule (Bill C-32)

Introduction: Property Flipping

House flipping, or property flipping, generally involves the purchase, renovation, and disposition of a residential property within a relatively short period of time. For pre-construction purchases, reselling the rights to purchase a property before its official sale can also be considered house flipping for tax purposes. The Canada Revenue Agency defines "a flipped property" of a taxpayer as a housing unit located in Canada, that is not already considered to be inventory of the taxpayer, and was owned by the taxpayer for less than 365 consecutive days prior to the disposition of the property (the "Holding Period"), with certain circumstances qualifying for exemptions. In the case of a taxpayer who owns a right to acquire such a housing unit, the Holding Period resets once the taxpayer secures ownership of the property and obtains the legal title. If the disposition of the property can reasonably be considered to occur to, or in anticipation of the one of the following circumstances, then the sale of the property may not be considered house flipping by the CRA:

• The death of the taxpayer or a person related to the taxpayer;
• The taxpayer or a related person is suffering from a serious disability or illness;
• A related person joining the taxpayer's household or the taxpayer joining a related person's household (e.g., birth of a child, adoption, care of an elderly parent);
• The breakdown of a marriage or common-law partnership of the taxpayer, where the taxpayer has been living separate and apart from their spouse or common-law partner for at least 90 days prior to the disposition;
• A threat to the personal safety of the taxpayer or a related person (e.g., the threat of domestic violence);
• An involuntary termination of the employment of the taxpayer or the taxpayer's spouse or common-law partner;
• An eligible relocation of the taxpayer or the taxpayer's spouse or common-law partner (e.g., generally, a relocation that enables the taxpayer to carry on business, be employed or attend full-time post-secondary education);
• The insolvency of the taxpayer; or
• The destruction or expropriation of the property.

Budget 2022: Residential Property Flipping Rule

The new Residential Property Flipping Rule was introduced in Budget 2022, included in Bill C-32, and received Royal Assent on December 15, 2022. For 2023 and subsequent taxation years, a new deeming rule applies to tax profits from the disposition of flipped property as business income, including rental properties. In addition, any losses resulting from the sale of a flipped property will be deemed to be nil and the disposition will not be qualified for the Principal Residence Exemption. The new deeming rule effectively changes how gains on residential properties are ordinarily treated for tax purposes and the eligibility criteria for the Principal Residence Exemption. The goal of the new policy is allegedly to address the skyrocketing housing prices and to deter tax avoidance from people who classify profits from property flipping as capital gains. However, there is no proof that this new rule can achieve such a difficult goal while imposing additional burdens on ordinary taxpayers who are not in the business of flipping houses and who are unfamiliar with the new and existing tax implications. In addition, to provide proof of eligibility for exemptions, taxpayers unfortunately will have to disclose personal matters that may otherwise be completely irrelevant to their taxes. For example, if you have to sell your house within a year of purchase because your parents all of a sudden fall ill and require your care, you will likely be required to disclose and provide proof of your parents' medical conditions.

Following the footsteps of the federal government, the province of British Columbia will implement a "house-flipping tax" starting in 2025. Details of the policy have yet to be released and the tax seems to be a certain percentage on profits from disposition of a residential property, if the property was held for less than two years. The maximum amount payable will be 20% of the profit from the disposition if the property was owned for less than a year prior to the sale. Although the detailed rules may differ, similar exemptions permitted by the CRA may well apply to the BC house-flipping tax.

Current Tax Treatment Of Gains From Disposition Of Residential Property

As a result of the new Residential Property Flipping Rule, tax treatments of gains from disposition of a residential property can vary dramatically, even without taking provincial policies into consideration.

1. If the disposition of a residential property qualifies for Principal Residence Exemption, then the profits are not taxable.
2. If a taxpayer disposes of a rental property that he or she has owned for over one year, then the gains/losses from the sale will be capital gains/losses. Taxable capital gains are 50% of the total gains and capital losses can only be used to reduce capital gains.
3. If a taxpayer purchases, renovates, and sells a residential property after owing it for over a year with an intent to make a profit, the gains from the sale will be included in the taxpayer's income as business income. If there is a loss, the loss will be business loss.
4. If a taxpayer flips a residential property after owning it for less than one year, the Residential Property Flipping Rule applies. As a result, gains from the sale will be business income and 100% of the profit will be included in the taxpayer's income. The loss from the sale will be deemed nil.

Pro Tips – Beware Of The Additional Obligations Stemming From The New House Flipping Rule

The new Residential Property Flipping Rule makes it more difficult for taxpayers to qualify for Principal Residence Exemption and imposes additional burdens on taxpayers to prove that the disposition of their properties was not Property Flipping. In particular, taxpayers who have renovated their properties and later occupied the properties, whether or not the renovation was substantial, will likely need to hold the property for at least one year before qualifying for the Principal Residence Exemption. This is an additional requirement to qualify for the Principal Residence Exemption. Prior to 2023, no strict time limit was imposed regarding the length of ownership. For example, if you bought a house on January 1, 2023, and the renovation of the house completed on March 31, 2023. You then moved into the house and resided in the house until it was sold on December 30, 2023. Under the Residential Property Flipping Rule, profits from the sale of the house will not qualify for the Principal Residence Exemption unless you experienced circumstances in the list of exemptions under the new rule. 100% of the profit will be added to your 2023 income and be taxed accordingly. If you purchased and disposed of the house in 2022, in contrast, you would qualify for the exemption and the profit would not be taxable.

If you disposed of a residential property in 2023 or will be disposing of a residential property in the near future, you need to be aware of the Residential Property Flipping Rule. You can engage with one of our expert Toronto income tax lawyers if you are unsure whether the Residential Property Flipping Rule applied or will apply to you. Our expert Canadian tax lawyers can provide legal advice and assist you with understanding the applicable rules.

FAQ

What Happens If The New House Flipping Rule Applies To Me?

The new House Flipping Rule, formally known as the Residential Property Flipping Rule, can result in significant tax liabilities. If the rule applies to you and you incurred a gain from disposition of your residential property, 100% of the profits from the sale will be included in your taxable income of the year during which the sale occurs. If you incur a loss while the rule applies to you, you cannot claim the loss against any of your income for the year since the loss will be deemed to be nil.

What Records Should I Prepare If I Qualify For One Or More Of The Residential Property Flipping Rule Exemptions?

The Canada Revenue Agency may require a variety of documentation in support of your claim for exemptions, depending on your specific circumstances. Such requirement can be easy or difficult to satisfy. For example, it is easy to understand how a death certificate can prove the death of a taxpayer or a person related to the taxpayer. However, if you are required to prove "an eligible relocation of the taxpayer or the taxpayer's spouse or common-law partner," it may be hard to understand what proof is necessary. If you are unsure about what evidence you should obtain or submit to support your exemption claim, please engage with one of our expert Canadian tax lawyers to obtain legal advice specific to your case.