01 Mar 2023
Changes to the Residential Property Flipping Rule
The Canadian real estate market has been on an upward trend for some years due to low interest rates, a growing population, and a strong economy. Taxpayers should consider the tax consequences when the property is sold.
The sale of Canadian real estate will typically trigger capital gains of which only 50% of the increased value is taxable, resulting in a tax rate of approximately 27%1. If the property is the taxpayer’s principal residence, the gain may not be subject to tax – this is known as the Principal Residence Exemption. However, Budget 2022 introduced new changes to the residential property flipping rule that is now law2 , which may significantly change the expected tax result if the property is a Flipped Property.
The rules took effect on January 1, 2023 and will apply to homes sold after December 31, 2022.
What is a “Flipped Property”?
A “Flipped Property” includes any type of taxpayer housing unit3 (other than property that is considered inventory4 ) within Canada that was owned for “less than 365 consecutive days prior to the disposition of the property.”
Exceptions to the Residential Property Flipping Rule
There are some exceptions to this property flipping rule if the disposition was a result of:
- The taxpayer’s death or the death of a person related5 to the taxpayer
- Common-law relationship or marriage breakdown of the taxpayer (where the individuals have been living apart for at least 90 days prior to the disposition)
- A related individual joining a household such as a newborn, an elderly relative in need of care, or an adopted child.
- The personal safety of the taxpayer or a related person is threatened
- The taxpayer or a related person has a serious illness or disability
- The taxpayer, spouse, or common-law partner experiences an “eligible relocation” (e.g., a work relocation where the new residence is not less than 40 km closer to the new work location)
- The taxpayer, spouse or common-law partner experiences involuntary termination of employment
- The destruction of the property (either human-caused or natural disaster) that is outside the taxpayer’s will
- Insolvency of the taxpayer
1Top tax rate for individuals resident in BC
2The rules were included in Bill C-32 which received Royal Assent in December 2022
3The housing unit representing the taxpayer's principal residence generally must be inhabited by the taxpayer or by his or her spouse or common-law partner, former spouse or common-law partner, or child.
4For example, property that is held by a developer for sale.
5 Individuals connected by blood relationship, adoption, marriage or common law partnership. Relationships of control involving corporations.
CRA Anti Flipping Tax Consequences
If the property is a “Flipped Property” the increased value will be taxed as business income. This means the tax rate on the increased value of the property could be 53.5%, double what it would have been if the increased value was taxed as a capital gain. Further, the Principal Residence Exemption will not be available on this property.
The residential property flipping rule states that if a taxpayer does not report the sale of residential property as business income when required, the Canada Revenue Agency (“CRA”) could assess a gross negligence penalty up to 50% of the additional taxes owing plus interest charges.
Taxpayers will now need to confirm that:
- The property is not held as inventory and
- Support that the property is not a “Flipped Property”
If the taxpayer is not able to confirm the above, the taxpayer may be subject to the increased taxes and the related penalties and interest.
Manning Elliott Is Here to Help
We are here to help with all your tax needs. If you still have questions about how the residential property flipping rule has changed, please reach out to our tax experts or contact us through one of our Manning Elliott offices.
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NOTE: Tax laws are complex and are subject to frequent change. The contents of this article are not intended to represent legal or tax advice. Please consult your tax adviser before employing any strategies discussed here.