Canada’s Property Flipping Tax Implications for Investors

Property flipping is a common strategy in real estate investment in which an individual or a company purchases a property intending to resell it quickly to make a profit. This strategy often involves buying properties below market value, making improvements or renovations to increase the property's value, and then selling them at a higher price.

When a taxpayer sells a residential property, depending on the situation, the gain is treated as fully taxable business income or as a capital gain, which is taxed more favourably. For individuals, if the property qualifies as a principal residence, the gain may be reduced or eliminated by claiming the principal residence exemption.  

Prior to January 2023, residential property owners could enter quick flips with the intent to either use the principal residence exemption or with the assumption that the gain on their property would automatically be treated as a capital gain and be subject to a more favourable tax rate. However, it's crucial to note that several factors determine the tax treatment of such transactions, and misconceptions can lead to significant and costly tax implications.

The Residential Property Flipping Rule

The Canadian property tax flipping rule introduced in January 2023 was aimed to curb speculative real estate practices and ensure that profits from rapidly reselling properties are appropriately taxed. A “flipped property” is defined as a housing unit that:

• is located in Canada 

• would not otherwise be inventory of the taxpayer 

• was owned by the taxpayer for less than 365 consecutive days prior to the disposition of the property

Under this rule, a gain on a flipped property is deemed to be business income and is fully taxable. It does not qualify for the capital gains inclusion rate or the principal residence exemption. To illustrate, let's say you purchased a property personally for $500,000 with the intent to rent it out for six months before selling it for $600,000. In this scenario, the flipped property rules will kick in, and the transaction would be deemed to be business income.  You would be taxed on 100% of the gain of $100,000 ($600,000 - $500,000) instead of on 50% of the gain at $50,000 ($600,000- $500,0000) X 50% if it was considered a capital gain. This example highlights the potential tax implications that property flippers need to be aware of.

Additionally, any losses resulting from the sale of a flipped property is deemed to be nil. Hence, you will not be able to write off this loss against your income.

Exceptions to the Rule

The rule includes several exemptions where the 12-month holding requirement does not apply. These exemptions cover sales necessitated by specific life events. There are exceptions to this rule if the disposition of the property occurs due to one of the following life events:

• 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

• The breakdown of a marriage or common-law partnership of the taxpayer

• A threat to the personal safety of the taxpayer or a related person

• 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

• The insolvency of the taxpayer

• The destruction or expropriation of the property

The Canada Revenue Agency (CRA) may require various documentation supporting your claim for exemptions, depending on your specific circumstances. Hence, keeping proper records is essential.

Disposition of a Property Not Considered a Flipped Property

When the new deeming rule does not apply because a property is not considered flipped, such as when the taxpayer did not own the property for at least 365 consecutive days prior to its disposition, the tax treatment of any profits from the disposition would depend on whether the profits are considered business income or capital gains.

In general, if the property was held as a capital asset and the intention was to generate investment income rather than conduct a business, any profits from the disposition may be treated as capital gains. Capital gains are typically taxed at lower rates than business income. 

On the other hand, if buying and selling the property is deemed a business undertaking rather than an investment activity, any profits from the disposition may be considered business income and subject to higher taxation rates.

The determination of whether profits from the disposition of a property are taxed as business income or capital gains is often a question of fact. It depends on various factors, including the taxpayer's intentions, the frequency of similar transactions, the nature of the property, and the overall circumstances surrounding the sale. It is important that these guidelines outlined by CRA, based on previous court cases, are considered when determining which scenario an investor falls under. 

Planning Strategies

1. Incorporating your property flipping business: If you are truly in the business of property flipping, consider incorporating your business. Income earned from property flipping would be considered active business income and would be taxed at a lower rate than your personal income if you are on a higher marginal tax bracket.

   
   

2. Longer holding period: Holding the property for more than 12 months can help avoid the classification of the sale as a flip. The longer holding period indicates that the property was not purchased with the primary intent of quickly reselling for profit.

   
   

3. Intent and Use: The intended use and actual use of the property can influence whether it is considered a flipped property. Factors that may indicate the property was not intended for flipping include:

   
   

4. Owner Occupancy: If you lived in the property as your primary residence.

   
   

5. Rental Property: If the property was used as a long-term rental and not bought with the intention of short-term resale.

   
   

6. Capital Improvements: If significant improvements were made to the property with the intent of long-term appreciation rather than quick resale.

The key to avoiding the classification of a property sale as flipping lies in following the criteria outlined above and demonstrating that the property was not purchased with the primary intent of quick resale for profit. Utilizing exemptions, maintaining proper documentation, and consulting with professionals are essential strategies to ensure compliance with tax laws and minimize your tax liability.