The Anti-Flipping Rule
In August of 2022, the Federal Government published a draft legislation that introduced the new anti-flipping rule which ensures that any profit earned from a flipped property will be fully taxable. Flipping a property refers to the act of purchasing real estate property with the intent to resell it with in a short period of time with a view to earning a profit.
The current law in relation to the sales of real estate is as follows:
Principal Residence Exemption in Canada, if you are selling your primary home residence, the gain on the property is non-taxable. To be considered a primary residence, you, your spouse, and/or your children must be physically living in the property for at least part of the year.
Capital Gain Tax, if you are selling your secondary property or a property that is not your principal residence (such as a cottage or rental property), the profits you realize will be taxed as capital gains. This means that only 50% of the gain your realized will be subject to tax and the remaining 50% will be tax-free.
The New Residential Property Flipping rule will change this dynamic. Under this law, if you sell real estate that you have owned for less than 12 consecutive months, you will be deemed to have flipped the property. As a result, any profits earned will be 100% taxable as business income, even if the property is your principal residence. Since the government believes that flipping a property is a business activity and should be treated just like any other business venture, the profits will not be subject to the preferential 50% capital gain tax.
This rule came into effect on January 01, 2023 and will apply to any residential real estate sold on or after this date.
Are There Any Exemptions ?
Fortunately, the Federal government carved out some exemptions for extraordinary life events which include the following:
Death
Breakdown of marriage
Birth of a child
Serious disability of illness
Relocation of work
Bankruptcy or insolvency
In these situations, the profit from the sale of the home will not automatically be deemed to be business income. However, despite meeting an exemption or owning a property for over 12-month period, the question of whether the property will be taxed as business income will remain a question fact determined by the CRA. Thus, a home owner can still be subject to CRA audit and liable for the 100% taxable agin even though they meet an exemption or the time period.
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