The new rule for flipped properties in Canada
Published on March 21, 2023
Since January 1, 2023, flipped properties in Canada have been subject to a new measure aiming to stop speculation and encourage property prices to come down. Announced as part of the federal budget presented on April 7, 2022, provisions amending the Income Tax Act are making it much less profitable to dispose of a property owned for 365 days or less.
By cracking down on investors looking to turn a quick profit, the federal government hopes to make housing more accessible and affordable for all. Canada’s new residential property flipping rule is changing the real estate tax landscape.
Discover the implications of this tax, nicknamed “the anti-flipping rule.”
Summary:
Explanation of the anti-flipping rule
Amendments to the Canadian tax rules came into effect on January 1, 2023. This new rule states that the profit made on a flipped residential property (including rental property) owned for less than 365 consecutive days is considered by the Canada Revenue Agency to be fully taxable business income.
This presumption of business income means that the seller can no longer claim the principal residence exemption on the sale of their principal residence within 12 months of its purchase, nor only pay tax on 50% of the capital gain generated from the sale of a secondary residence.
The anti-flipping rule also applies to the right to purchase a residential property disposed of by assigning the promise to purchase. This measure applies to new or substantially renovated individual residential properties. For example, the profit gained from assigning the promise to purchase of a pre-construction condo that was accepted less than 12 months prior would be taxable at 100%. It should also be noted that the 12-month deadline resets upon taking possession of the property for which a promise to purchase had been concluded.
Exceptions to the rule
In addition to transactions completed at a notary’s office before January 1, 2023, the 2022 federal budget includes other exceptions to the property flipping rule. If the transaction involves at least one of the following life events, the rule should not apply:
- The death of the taxpayer or a person related to the taxpayer
- Divorce or separation (if the taxpayer has been living apart from their spouse or common-law partner for at least 90 days prior to the sale)
- A person related to the taxpayer becoming a member of the taxpayer’s household (birth, adoption or taking in an elderly parent) or the taxpayer becoming a member of the household of a related person
- The taxpayer or a related person suffering from a serious injury or disability
- A threat to the personal safety of the taxpayer or a related person
- An involuntary termination of the employment of the taxpayer or the taxpayer’s spouse or common-law partner
- The insolvency of the taxpayer
- An involuntary disposal (destruction or expropriation) of the property
- An eligible relocation (for work, education or to run a business, more than 40 kilometres away)
That said, Stéphanie Fillion, notary at DuProprio, points out that “even with these exceptions, it is still possible that the gain will be taxable at 100% because it is a question of fact that is evaluated according to the person’s intention at the time of the purchase.” Therefore, if someone buys a property with the intention of reselling it, the profit they make on it is considered business income.
To check how this rule applies to your particular case, it is recommended to consult an accountant, a tax professional, a lawyer or a notary in private practice. If you are a DuProprio client and your package gives you access to legal assistance over the phone, you can schedule a call with one of our notaries, who will be able to guide you and explain the rule.
Selling a property after 365 days
While the tax rules have been amended for all residential properties sold within 365 days or less, they have not changed for properties sold after 365 days. According to the 2022 federal budget, the goal is to target investors taking advantage of quick flips “while protecting the current, vitally important, principal residence exemption for Canadians who use their houses as homes.”
The principal residence exemption
Generally, acquiring a residential property generates capital gain over the long term. Half of this profit is taxable. If the property is used as a principal residence and is “ordinarily inhabited” during all the years of ownership, the seller gets a tax credit from the Canada Revenue Agency and Revenu Québec. In that event, the profit from the sale is tax-free if the residence has been owned for more than 365 days. This is the principal residence exemption.
The following dwellings can be a principal residence:
- A house
- An apartment
- A duplex unit
- A residential building
- A cottage
- A condominium unit or condominium building
- A trailer
- A mobile home
- A floating house
Only one residence per family unit, per year, can be exempted from the capital gain made on the sale. There is no timeframe associated with the notion of “ordinarily inhabited.” It is therefore possible to designate your seasonal residence as your principal residence.1 If a portion of the principal residence is used to generate income, tax will be calculated on the percentage that is not inhabited by the owner-occupant.
The sale of a secondary residence
When selling a second home, taxes must be paid on the capital gain. For example, if a property was purchased for $400,000 and sold for $600,000, 50% of the $200,000 profit is taxable.
A commercial sale
If you acquire a residential property for the purpose of quickly reselling it or converting it into short-term rental property, the Canada Revenue Agency considers the sale to be “an adventure or concern in the nature of trade” in which it is possible to suffer a loss as well as realize a gain. It is therefore a business gain (or loss) that is taxable in full, just like a sale within 365 days of purchasing a property. In this scenario, the seller cannot claim the principal residence exemption, even if the residence was used as such. Moreover, anyone planning to renovate a residential building with the aim of flipping it needs a contractor’s licence from the Régie du Bâtiment du Québec to do the work.
What about donations?
Giving your property or land to your child during your lifetime is considered a sale by law. It is therefore worth checking how much you may be required to pay in taxes before making a donation.
The role of tax specialists
Tax rules are complex and they differ for Quebec and Canada. This is why it is recommended that you consult a tax specialist. Their role is to ensure compliance with the current legal and tax framework. They can evaluate your property-selling project to determine how it could impact your financial situation. Was your principal residence also your principal place of business? Has it been your principal residence for only a few years? These and many other situations can impact your provincial and federal tax return. It is better to make the decision to sell with full knowledge of all the rules that apply.
Remember that any property sale, regardless of the circumstances, must be reported on your tax return for the year it was sold!
Planning to sell a property? Our team is established throughout Quebec and is made up customer service advisors, representatives, real estate coaches, appraisers and notaries. With DuProprio, you get access to the visibility and support you need for a successful sale! Learn about our services by watching our short webinar or calling us at 1-866-387-7677.
