The tax code defines a “flipped property” as a residential housing unit located in Canada that meets the following criteria:
- The property is not already considered inventory of the taxpayer.
- The taxpayer owned the property for less than 365 consecutive days prior to its disposition, unless the disposition is attributable to or anticipated due to specific life events.
These life events include:
- The death of the taxpayer or a related person.
- A related person joining the taxpayer’s household, or vice versa (e.g., birth, adoption, or care of an elderly parent).
- The breakdown of the taxpayer’s marriage or common-law partnership, where they have been living separate and apart for at least 90 days.
- A threat to the personal safety of the taxpayer or a related person (e.g., domestic violence).
- The taxpayer or a related person suffering from a serious disability or illness.
- An involuntary termination of the taxpayer’s or their spouse/common-law partner’s employment.
- An eligible relocation of the taxpayer or their spouse/common-law partner (e.g., for business, employment, or education).
- The taxpayer’s insolvency due to accumulated debts.
- The destruction or expropriation of the property (e.g., due to a disaster).
Additionally, for taxpayers who hold a right to acquire a housing unit (typically a pre-sale of new construction), the 12-month holding period resets once ownership of the property is transferred through a purchase and sale agreement. It’s unclear whether the assignment of the right to acquire would constitute a “flip” – this would be a question for a real estate lawyer. Moreover, even if the property isn’t considered “flipped” by the definition above, CRA retains the right to deem the sale a business transaction, and levy taxes accordingly. Such is our wonderful tax system. Or as CRA puts it: “In cases where the new deeming rule does not apply, either because the property is not considered flipped property due to a qualifying life event or because the taxpayer owned the property for at least 365 consecutive days prior to its disposition, the taxation of profits from the disposition would be determined based on the specific circumstances of the transaction.” The CRA will consider factors such as the taxpayer’s intention at the time of acquisition, the frequency and continuity of similar transactions, the nature of the property, and the taxpayer’s involvement in the transaction in making this determination.
If the transaction is deemed to be more in the nature of an investment or passive activity, the profits may be treated as a capital gain and subject to the capital gains tax regime, potentially including the 50-per-cent capital gains inclusion rate and eligibility for the Principal Residence Exemption.
On the other hand, if the transaction is deemed to be more akin to an active business activity, such as property flipping conducted as part of a business venture, the profits may be taxed as business income and subject to ordinary income tax rates.
Ultimately, each case would be assessed on its own merits, taking into account all relevant factors to determine the appropriate tax treatment of the profits from the property disposition. By way of summary, then, the profits on a real estate sale may be: tax-free if the principal residence exemption applies; a capital gain if CRA deems you to be a passive investor; or business income if you’re deemed to be a flipper, or they just don’t like you for whatever reason. Clear as mud. The take away is to check with a real estate lawyer to understand the tax implications of any real estate transactions you’re contemplating.
Check our other blogs under Real Estate 101 – that might give you answers about buying or selling a home.
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