To help mitigate the rising cost of Canadian real estate, the Federal Government enacted new anti-flipping rules for residential properties sold on or after January 1, 2023. These rules will significantly change the taxation of profits for certain sales of Canadian residential real estate.
How Are Residential Properties Taxed?
The profits from a residential property sale can be taxable as either a capital gain or business income. For a capital gain, only 50 per cent of the profits are taxable. For business income, 100 per cent of the profits are taxable. If the property is a “principal residence” as defined under the Income Tax Act (Canada), the capital gain could be further sheltered by the principal residence exemption. Expectedly, taxpayers will have a preference to categorize a sale of Canadian residential real estate as a capital gain due to its favorable inclusion rate of 50 per cent.
Although the Income Tax Act (Canada) does not define which profits are considered business income or capital gains, the Courts have established various factors over the years to identify the type of income that arises on the sale of property. These factors include:
- The taxpayer's intention at the time of purchase;
- the feasibility of the taxpayer’s intention and the extent to which the intention was carried out by the taxpayer;
- the nature of the business, profession, calling or trade of the taxpayer and the other individuals involved with the purchase;
- the nature of the occupation of the other individuals involved with the purchase and their courses of conduct;
- the extent to which borrowed money was used to finance the purchase and the terms of the financing, if any, arranged;
- the length of time the property was held by the taxpayer;
- factors which motivated the sale of the property; and
- evidence that the taxpayer and/or other individuals involved with the purchase had dealt with real estate extensively.
The factors listed above are neither exhaustive nor conclusive in determining whether the profit will be taxed as a capital gain or as business income. The CRA’s conclusion will vary depending on their analysis of the facts and circumstances of the sale transaction in question.
What Are The Anti-Flipping Rules?
The anti-flipping rules will deem the profit from the sale of a flipped property to be business income, such that 100% of the profits will be taxable.
The definition of a “flipped property” includes any residential property that was owned by the taxpayer for less than 365 consecutive days prior to the sale. Whereas the duration of ownership was previously merely a factor to be considered (see list above), the new deeming rules now deem that any residential property that is sold within one year of ownership will be taxed as business income.
In addition to the deeming rules described above, the new rules will not allow a taxpayer to utilize the principal residence exemption even if the property meets the definition of a “principal residence”.
If the property was owned by the taxpayer for more than one year prior to the sale, it would remain a question of fact whether the profits from the sale are to be taxed as business income or as a capital gain.
Are There Exceptions?
The deeming rules discussed above may not apply in situations where the property is sold within one year of purchase, if the sale is due to one of the exceptions described below.
However, please note that even if one of these exceptions apply, any sales of Canadian residential real estate could still be subject to tax at an inclusion rate of 100 per cent depending on the factors outlined above.
- 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 (i.e., a birth of a child, adoption, care of an elderly parent);
- 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 (i.e., the threat of domestic violence);
- the taxpayer or a related person suffering from a serious illness or disability;
- an “eligible relocation” (for example, a relocation to move closer to a new work location or to pursue further education) of the taxpayer or taxpayer’s spouse or common-law partner;
- an involuntary termination of the employment of the taxpayer or the taxpayer’s spouse or common-law partner;
- the insolvency of the taxpayer (i.e., due to an accumulation of debts);
- the destruction or expropriation of the property (e.g., where the property is destroyed due to a natural or man-made disaster).
Other Tax Highlights
Penalties: If a taxpayer does not correctly report the profit on the sale of a residential property, they could be assessed a gross negligence penalty equal to 50 per cent of the additional taxes owing, in addition to interest charges.
GST/HST: GST/HST implications will also need to be considered on the sale of a residential property.
Assignment Sales: As of April 20, 2023, the Federal Government issued a proposal to amend the definition of a “flipped property” to extend it to include a right to acquire a housing unit in Canada. This means that if this legislation is enacted, assignment sales would be deemed to be business income if the rights to purchase a property were assigned after having been held for less than a year. This also means that the anti-flipping rules could apply on the sale of a constructed property within one year of acquiring ownership (regardless of how long the taxpayer held the rights to purchase the property before it was constructed).
This article has been prepared for the general information of our clients. Please note that this publication should not be considered a substitute for personalized advice related to your situation.