Canada’s high cost of homeownership is driving many potential buyers out of the housing market. In response, the Federal Government proposed new anti-flipping tax measures in the 2022 budget aimed at reducing speculative demand in the housing market, which could help manage housing prices and make homeownership affordable for more Canadians.
The new measure became law on December 15, 2022, and introduces considerations for Canadians who are thinking about selling their residential real estate. Specifically, the sale of residential property that the owner has held for fewer than 12 months will be considered flipping and the profits from the sale will be taxed as business income. It will apply to residential properties (including rental properties) sold on or after January 1, 2023.
We have summarized the most important facts about the new anti-flipping rules to assist you if you’re considering selling your residential real estate in 2023.
What is flipping?
Property flipping is when an individual (the “flipper”) purchases a house and sells it within a short period of time with the intent of making a profit over the original purchase price. In some cases, the flipper will renovate the property in an attempt to maximize the property’s resale value, though this is not strictly required to meet the definition of flipping.
Why has the Federal Government introduced the anti-flipping tax rules?
The Federal Government has attributed high housing prices partly to property flipping.
The new anti-flipping tax measures are intended to ensure profits from these types of sales on residential property are subject to full taxation as business income. The new measures aim to reduce speculative demand, which may bring down the high cost of the housing market.
How will the new measure affect residential property owners?
Previously, when an individual sold a residential property that was held for personal use or to generate rental income, the profits were considered capital gains. If the property was the “principal residence” of the homeowner, the owner could claim the principal residence exemption to eliminate any tax arising from the gain. If the owner was not able to claim the principal residence exemption, the tax rules allowed for only 50 percent of the gains from the sale to be taxed.
For the profit from the sale to be fully taxed as business income, the Canada Revenue Agency (CRA) generally needed to prove that the property was not the principal residence of the owner, or that
the seller’s primary intention of acquiring the property was to flip the property in the pursuit of profit.
Under the new anti-flipping rules, the profits from the sale will be fully taxed as business income if the seller has held the property for fewer than 12 months (subject to a number of exceptions).
This means the sale of the property within this time frame will generally no longer be eligible for either capital gains tax treatment or the principal residence exemption—and the CRA no longer has a burden to prove that the seller had the primary intention of acquiring the property to make a profit from flipping the property.
What are the exceptions?
Exceptions to the new anti-flipping measure are available to individuals who sell their residential property within 12 months.
These exceptions include:
- Addition to household (including birth, adoption, or of elderly parent)
- Breakdown of marriage or common-law partnership
- Threat to personal safety
- Serious illness or disability
- Work relocation (new home must be at least 40 kilometres closer to new work location)
- Involuntary termination of employment
- Involuntary disposition (e.g., due to natural disaster)
Such exceptions are helpful to reduce the tax impact of the new rules for many homeowners, but it may be necessary to produce documentation to support the exception, and many other situations will fall outside of the exceptions.
Check if your sale will be impacted by the new tax
The anti-flipping rules introduce new considerations for Canadians who are thinking about selling their home or residential rental property starting in 2023. Before you put your property on the market, review the new measures enacted by the Federal Government to evaluate whether they will affect your sale. The new rules may also impact decision making for purchases of residential real estate, whether it be for personal use or investment purposes.
The CRA can assess significant penalties and interest for failure (under gross negligence) to report the gain on the sale of residential property as business income.
For more information, contact your local MNP office in Saskatchewan or Kelly Disiewich, CPA, CA.
KELLY DISIEWICH, CPA, CA
MNP (Real Estate and Construction Leader – North Saskatchewan)