New Residential Property Flipping Rules

If you’re thinking of buying or selling a residential property in Canada, you may want to pay attention to the new Residential Property Flipping Rule that was introduced in Budget 2022 and became law on December 15, 2021. This rule aims to curb the practice of property flipping, which involves purchasing and reselling a residential property in a short period of time to realize a profit. Starting January 1, 2023 and all subsequent years, the new rule deems the profits from flipped property as business income, which means they are fully taxable and do not qualify for the capital gains inclusion rate or the principal residence exemption. In this blog post, we will explain what property flipping is, how the new rule works, and what exceptions and implications it has for residential property owners in Canada.

Before we can delve into the details of the law, we first need to define what property flipping is. Property flipping is a term that describes the practice of buying and reselling a property in a short period of time for a profit. This can also include reselling the rights to purchase a property before its official sale, which is sometimes called “shadow flipping” or “assignment sale”. Property flipping is different from buying a property and holding it for long-term appreciation or rental income. Property flipping can be done in two ways:

In the first case, property flippers buy properties in areas where the prices are rising fast and sell them within a few months or even weeks, without making any significant changes to the property. They rely on the market conditions to generate profits, rather than the quality or features of the property. This type of flipping is risky, as the market can change unexpectedly and leave the flippers with a depreciating asset.

In the second case, property flippers use their knowledge and skills to identify properties that are below their potential value and renovate them to increase their appeal and worth. They may make cosmetic changes, such as painting, landscaping, or staging, or more substantial improvements, such as repairing, upgrading, or adding rooms. They then sell the properties for a higher price than they paid, after deducting the costs of purchase, renovation, and holding. This type of flipping is less dependent on market timing, but more on the flippers’ ability to find and fix undervalued properties.

Under the new rule, profits from the sale of a flipped property are deemed to be business income. Where the new deeming rule applies, profits on the sale cannot be treated as a capital gain (50-per-cent income inclusion) and the Principal Residence Exemption is not available if the property is sold within 365 consecutive days from the date of purchase. This is a change from the previous years, when an individual could sell a residential property that was held for personal use or to generate rental income and treat the profits as capital gains. If the property was the “principal residence” of the homeowner, the owner could claim the principal residence exemption to eliminate any tax arising from the gain. Any losses from the sale of a flipped property are deemed to be nil - meaning it may not be used to reduce the taxable income of the individual taxpayer.

Here is an example of the consequences for capital gains tax if a house was purchased for $500,000 and sold for $700,000 under the new Residential Property Flipping Rule:

First scenario: The house was sold within the 365-day holding period. In this case, the house is considered a flipped property and the profit of $200,000 is deemed to be business income. This means that the entire amount is taxable at the marginal tax rate of the seller.

Second scenario: The house was sold after the 365-day holding period. In this case, the house is not considered a flipped property and the profit of $200,000 may be treated as a capital gain or business income depending on the facts and circumstances of the sale. If the seller can show that they did not intend to flip the house when they bought it, they may be able to treat the profit as a capital gain and only pay tax on 50% of the amount ($100,000).

The disposition of the property can reasonably be considered to occur due to, or in anticipation of one of the following life events (Source: Canada.ca):

The death of the taxpayer or a person related to the taxpayer.

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).

The taxpayer or a related person is suffering from a serious disability or illness.

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 (e.g., due to an accumulation of debts).

The destruction or expropriation of the property (e.g., where the property is destroyed due to a natural or man-made disaster).

For further information please contact Taxtron Support at 416-491-0333 or visit www.taxtron.ca