The new anti-flipping measure took effect in January 2023 and is another effort by the government to control real estate speculation in Canada, similar to the foreign buyer ban. If real estate is bought and sold within 365 days, the CRA deems the property to be “flipped property” and any profit from the transaction is treated as business income to the taxpayer. There are specific exemptions outlined below.
Background
The anti-flipping measure was put into place by Bill C-32 and amends the Income Tax Act (the “ITA“) to add a subsection specifically to deem proceeds from a “flipped property” as business income meaning 100% of the profit is included as income for the taxpayer. In the past, one of the advantages of transacting in real estate was that the profit could be treated as a capital gain and therefore only 50% of the profit would be taxed in the hands of the taxpayer.
Even before this anti-flipping measure, if a taxpayer flipped property, it would still generally be classified as business income. But taxpayers who did this in their personal capacity often reported any profits as a capital gain by justifying the real estate as an investment property and/or making use of the Principal Residence Exemption (more on that below). The new anti-flipping measure introduces a “bright-line rule” to prevent taxpayers from taking advantage of this grey area.
What is “Flipped Property”?
It is important to distinguish between the colloquial term we use everyday when we talk about “flipping property” and the CRA definition.
Colloquially, a simple definition of flipping property is the act of buying and selling a property quickly for profit.
In the anti-flipping measure, the CRA’s definition of “flipped property”: is any housing unit of a taxpayer that was owned for less than 365 consecutive days prior to the disposition of the property with several important exemptions. If the disposition occurred due to, or in anticipation of one or more of the following events, then it would not be considered flipped property:
- death of a taxpayer or a person related to the taxpayer;
- change in the taxpayer’s household in connection with a related person;
- breakdown of a marriage or common-law partnership if the partners have been living separate and part for at least 90 days prior to disposition;
- a threat to the personal safety of the taxpayer or a related person;
- the taxpayer or a related person suffering from a serious illness or disability;
- an eligible relocation (as defined in s248(1) of the ITA);
- an involuntary termination of employment of the taxpayer or the taxpayer’s spouse or common-law partner;
- the insolvency of the taxpayer; or
- the destruction or expropriation of the property.
The CRA’s definition of “flipped property” tries to capture the colloquial definition while introducing a level of certainty by creating a strict cut off point (a “bright line”) of 365 days of ownership. While the cut off is somewhat arbitrary, it eliminates a lot of the grey area as the previous requirement was based on intent of the taxpayer.
The CRA also disallows any loss from a flipped property if it falls under this S12 deeming provision for flipped property. Note that if the property is inventory of the taxpayer (ie. in a business that purposely buys and flips property) the loss would not be denied. This new deeming provision is not meant to capture and “punish” a dedicated real estate flipping business as they already treat any profit as business income.
What about the Principal Residence Exemption?
The Principal Residence Exemption will not exempt the gain from a flipped property. Unless the taxpayer is selling due to one of the exemptions, even if the property they sell is their personal residence, the gain will not meet the Principal Residence Exemption because the proceeds are deemed business income due to this new anti-flipping measure. See paragraph 2.6 of Income Tax Folio S1-F3-C2 for a detailed explanation why.
Potential GST/HST Implications
The Excise Tax Act (the “ETA“) imposes an obligation to remit GST/HST on taxpayers who are considered a “builder” under the Act. A taxpayer can be considered a “builder” if they resell a newly constructed property (ie. buying and selling a pre-construction condo soon after closing) or sell a property in which they substantially renovated.
For taxpayers who have deemed flipped property business income and meet the builder definition of the ETA, they will be required to remit to the CRA GST/HST. This means that the transaction price of the property will be deemed to include GST/HST that the seller will need to remit to the CRA which will further erode the profit, if any, from a flipping transaction.
Tips
If a taxpayer is in the situation of selling within the 365 day ownership period due to one of the exemptions, they should retain documentation for proof. The taxpayer has the burden to prove to the CRA that an exemption applies if the taxpayer is audited. Furthermore, the taxpayer should consult with a tax professional to ensure that their situation and/or documentation is sufficient to meet the exemption. By consulting a professional and relying on their expertise, it also offers taxpayer a layer of protection as the taxpayer has done their due diligence.
The CRA implements several algorithmic tools to flag returns for audits. If a taxpayer has a history of claiming the Principal Residence Exemption frequently, it might flag their return for a questionnaire and potentially an audit. Note that the CRA can reassess a taxpayer’s T1 return up to three years after the original Notice of Assessment but if the CRA alleges fraud or misrepresentation, they can reassess further back. In these audits and reassessments the burden of proof is always on the taxpayer therefore it is vitally important to consult a tax professional as early as possible in the process. Whatever the taxpayer tells the CRA should be able to be corroborated or proven through documentation or third parties.
Taxpayers should keep in mind that even if a property is sold after the 365 holding period, the transaction might still be considered business income from a flip. The determination will be based on the facts of the situation.
The anti-flipping measure is coming at a difficult time for taxpayers. With the increase in interest rates and mortgage payments, some home owners may find themselves in a difficult position financially. If the home owner has owned the property for less than 365 days, they might be caught under this anti-flipping measure even if they do not think they are flipping property.