Thinking of Flipping a Property in Canada? Here’s What You Need to Know About the Tax Rules

Thinking of flipping and selling a property within a year? The anti-flipping tax rules could quickly turn your profit into a tax liability. What was once a popular real estate strategy now comes with strict tax consequences. Without careful planning, you might end up handing over more to the CRA than expected. What Are the Residential Property Anti-House Flipping Rules? Property flipping involves purchasing real estate with the intent of selling it for a quick profit. The Canadian government introduced rules to address concerns that individuals were improperly reporting these profits as capital gains or even claiming the principal residence exemption.

Effective January 1, 2023, any residential property sold within 365 days of purchase is automatically classified as business income rather than capital gains. This means that the profit from such dispositions would not be eligible for the 50% capital gains inclusion rate or the principal residence exemption. This rule, however, only applies to gains on a sale, meaning that expenses incurred to earn income are tax deductible, but any resulting losses may be denied and cannot be claimed as a business loss.

When determining if a property sale is classified as business income, the court looks at factors such as the taxpayer’s intent at purchase, how long the property was held, the reason for the sale, and whether the taxpayer frequently engages in similar transactions.

Where Does the Flipped Property Rule Not Apply? In cases where the rule does not apply, the situation needs to be examined to determine whether the gain would be taxable as a business income or a capital gain— for example when a property has been owned for over a year or an exception applies. Some exceptions with this rule include sales due to the death of the taxpayer or a related person, divorce or separation, disability or illness, involuntary job loss, or relocation for work (at least 40 km closer to the new workplace). However, even if the flipping rule does not apply, a sale may still be considered business income rather than a capital gain if it is part of a pattern of real estate transactions or is classified as an adventure or concern in the nature of trade. Non-Compliance Penalties Failing to report a property sale as business income when required can lead to severe penalties, including a gross negligence penalty equivalent to 50% of the additional taxes owing, in addition to interest charges. Taxpayers who want to report an omission of income or correct a previous error may qualify for penalty relief under the CRA’s Voluntary Disclosure Program. However, one of the criteria to qualify is that no CRA enforcement action has already begun. Key Takeaway The tax implications of property flipping are complex, especially for short-term sales. Property owners must carefully assess their situation to ensure compliance with tax laws. Even when the flipping rule doesn’t apply, a sale may still be taxed as business income based on case law and transaction details. How Trowbridge Can Help At Trowbridge Professional Corporation, our team of tax experts specializes in optimizing tax strategies and helping clients navigate changing tax policies. If you're interested in learning more about how we can assist you in optimizing your tax planning strategies, we invite you to schedule a call with us today. Our dedicated professionals are here to guide you through the process and answer any questions you may have.