Client Update – CRA Flipping Out on Quick Home Sales!

February 17, 2023

New legislation was introduced in 2022, which is effective on residential property dispositions starting January 1, 2023. A new residential property flipping rule was introduced to focus on those individuals that would purchase a house and then turn around and sell or “flip” the property shortly thereafter for a profit. 

When a property is sold it can either be taxed as a capital gain or as business income.  A vendor would prefer to treat the sale as a capital gain as only 50% of the profit is included in income and the Principal Residence Exemption could eliminate any tax.  Prior to 2023, the tax treatment of a sale  was determined based on the intention at the time of the purchase.  

The new legislation codifies the Canada Revenue Agency’s long held position that property sold shortly after acquisition should be treated as business income unless some life event prompted the sale or disposition. As discussed in more detail later, the new rules provide that any sale of a home within a year of acquisition will be automatically treated as income unless the sale was due to certain life events.

With the new rules converting the disposition to business income, this further means that on the disposition of the property, the profit would not be reduced by claiming the Principal Residence Exemption either.

These new rules do not mean that sales after one year are automatically capital gains.  The tax treatment would be determined under the previous rules.

APPLICABLE PROPERTY

To fall into the new residential property flipping rules, the property:

• Would have been located in Canada;
• Was not inventory of the individual;
• Was owned for less than 365 consecutive days prior to the disposition; and 
• One of the exceptions does not apply. 

EXCEPTIONS

The exceptions to the new residential property flipping rules are when the sale was due to one of the following reasons:

• Death of taxpayer;
• Related person joining the household;
• Breakdown of marriage or common-law partnership;
• Threat to the personal safety of the taxpayer;
• Disability or serious illness of the taxpayer;
• Eligible relocation of the taxpayer or their spouse/common-law partner;
• Involuntary termination of employment of the taxpayer or spouse/common-law partner;
• Insolvency of the taxpayer; or
• Destruction or expropriation of the property against the taxpayer’s will.

These rules apply to any property sold within one year, even if the underlying land was held for a longer period of time.

GST/HST

An additional complication to the Residential Flipped Property Rules is the GST/HST implications that could arise. If an individual were to sell property subject to the Residential Flipped Property Rules, they also will be required to charge GST/HST on the sale. 

If you have any questions concerning the above, do not hesitate to contact your trusted advisor at Wilkinson & Company LLP.