Residential Property Flipping Rule
For 2023 and subsequent taxation years, Budget 2022 introduced a new deeming rule for residential real estate (including rental property). The new deeming rule is to ensure that profits from the disposition of flipped property are taxed as business income.
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1. What is property flipping?
Property flipping involves purchasing residential property and reselling the property in a short period of time to realize a profit. This also includes reselling the rights to purchase a property before its official sale.
2. What are the rules for reporting profits from property flipping?
The profit from property flipping is fully taxable as business income and does not qualify for the 50-per-cent capital gains inclusion rate or the Principal Residence Exemption.
3. What is flipped property?
A “flipped property” of a taxpayer is a housing unit located in Canada, that is not already considered to be inventory of the taxpayer and was owned by the taxpayer for less than 365 consecutive days prior to the disposition (12-month holding period) unless the disposition can reasonably be considered to occur due to, or in anticipation of one of the following life events:
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 (e.g., birth of a child, adoption, care of an elderly parent).
The breakdown of a marriage or common-law partnership of the taxpayer, where the taxpayer has been living separate and apart from their spouse or common-law partner for at least 90 days prior to the disposition.
A threat to the personal safety of the taxpayer or a related person (e.g., the threat of domestic violence).
The taxpayer or a related person is suffering from a serious disability or illness.
An involuntary termination of the employment of the taxpayer or the taxpayer’s spouse or common-law partner.
An eligible relocation of the taxpayer or the taxpayer’s spouse or common-law partner (e.g., generally, a relocation that enables the taxpayer to carry on business, be employed or attend full-time post-secondary education).
The insolvency of the taxpayer (e.g., 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).
In the case of a taxpayer who owns a right to acquire a housing unit located in Canada, the 12-month holding period resets once the taxpayer who entered into a purchase and sale agreement secures ownership of the property.
4. What is changing?
Starting on January 1, 2023, the new deeming rule applies to flipped property to ensure that profits are subject to full income inclusion. Under the new rule, profits from the sale of a flipped property are deemed to be business income. Where the new deeming rule applies, profits on the sale cannot be treated as a capital gain (50-per-cent income inclusion) and the Principal Residence Exemption is not available.
The 2022 Fall Economic Statement proposed that this deeming rule will be extended to include 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 before the end of the 12-month holding period. The 12-month holding period would reset once the taxpayer who entered into a purchase and sale agreement secures ownership of the property.
5. What if a loss is incurred as a result of the disposition of a flipped property?
Any losses resulting from the sale of a flipped property is deemed to be nil.
6. When does the deeming rule take effect?
The new deeming rule applies in respect of transactions occurring on or after January 1, 2023.
7. What if the property is not considered flipped property?
Where the new deeming rule does not apply because the property is not considered flipped property (e.g., due to a life event listed above or because the property was owned by the taxpayer for at least 365 consecutive days prior to the disposition), it would remain a question of fact whether profits from the disposition are taxed as business income or a capital gain.
8. Where can I get more information on the current rules regarding the sale of real estate?
For further information see the Capital Gains Guide, and the webpages Report your real estate income, or Tax effects of buying real estate to sell for a profit.
https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/federal-government-budgets/residential-property-flipping-rule.html