Residential Property Flipping Rule

In its 2022 budget, the government of Canada introduced new measures with the objective of slowing down the rise in residential real estate prices. Previously, taxpayers often took advantage of the 50% inclusion rate on capital gains when selling a property soon after acquiring it.

The Income Tax Act will be amended to curtail capital gain treatment on the disposition of a housing unit that is considered to have been “flipped”. All of the measures below will apply on properties disposed of in 2023 or later.

Briefly, when a disposition is considered to be “flipped property”, the taxpayer is deemed to carry on a business with respect to the flipped property, this flipped property is deemed to be inventory of the taxpayer’s business and any gain on its disposition is considered to be regular business income with an inclusion rate of 100%.

For a property to be considered a “flipped property”, it must be a housing unit of a taxpayer, located in Canada, that was owned by the taxpayer for less than 365 consecutive days prior to the disposition.

The property shall not be considered a “flipped property” if the disposition can reasonably be considered to occur due to, or in anticipation of, one or more of the following events:

• The death of the taxpayer or a related person;
• One or more persons related to the taxpayer joining the taxpayer’s household, for example, a newborn baby) or the taxpayer joining the household of a related person;
• The breakdown of the marriage or common-law partnership of the taxpayer if the taxpayer had been living separately from their spouse for at least 90 days prior to the sale;
• A threat to the personal safety of the taxpayer or a related person (for example, situations of domestic violence);
• The taxpayer or a related person is suffering from a serious illness or disability;
• An “eligible relocation” of the taxpayer or the taxpayer’s spouse or common-law partner (for example, moving because of a work relocation where the new home is at least 40 kilometers closer to the new work location);
• An involuntary termination of the employment of the taxpayer or the taxpayer’s spouse or common-law partner;
• A disposition due to the insolvency of the taxpayer or to avoid insolvency; or
• An involuntary disposition due to the destruction or expropriation of the property.

When the “flipping property” rules apply, the taxpayer cannot claim the principal residence exemption.

In addition, when the “flipping property” rules apply to the disposition of a property, any loss incurred on the disposition would be deemed to be nil.

Finally, the federal 2022 Fall Economic Statement proposes to extend this new deeming rule to profits arising from the disposition of the rights to purchase a residential property via an assignment sale. Profits arising from an assignment sale would be deemed to be business income if the rights to purchase a property were assigned after having been owned for less than 12 months. Furthermore, if the taxpayer held the rights to purchase the property before it was constructed, the 12-month period would begin again once they secure ownership of the property.

To learn more, please contact your Crowe BGK advisor.