Residential Property Flipping Rules – January 1, 2023.

Residential Property Flipping Rules – January 1, 2023.

As of  January 1, 2023 new rules are being implemented to ensure profits form residential properties flipping are subject to full taxation as business income.

The old rules.

Under the old rules there was a lot of room for interpretation and there wasn't a specific time of ownership of 12 month required of owing the property (many people thought this was the requirement, but that’s not the case). The transaction could have been treated as business transaction or capital gains, and if the property qualified as the principal residence there would have been no tax on sale. Many factors would have been taken into consideration such as:

• Intent on the outset of the purchase
• The nature of business of the individual owner of the property; real estate agents, general contractors and so on may have been looked differently than individuals not related to the real estate industry
• Frequency of transactions; how often did the individual bought and sold the properties
• Financing arrangements
• Length of time real estate was held (note that 12 months is not specified)
• Factors motivating the sale

The new rules.

Under the new rules the property held for less than 365 consecutive days will not be taxed as capital gains, it will be taxed as business income - fully taxable, these new rules apply to the properties sold after January 1, 2023.

The 12-month holding period for the Residential Property Flipping Rule will reset once the property is owned by the taxpayer who entered into a purchase and sale agreement. This will ensure the Residential Property Flipping Rule cannot be bypassed when selling a constructed property simply because a taxpayer held the rights to purchase the property before it was constructed. In other words, the 12-month holding period would reset once a taxpayer secures ownership of the property.

Exemptions.

The residential property flipping rule would not apply when a transaction is due to at least one of the following life events:

• The death of the taxpayer or a person related to the taxpayer
• One or more persons related to the taxpayer becoming a member of the taxpayer’s household or the taxpayer becoming a member of the household of a related person
• The breakdown of the marriage or common-law partnership of the taxpayer if 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
• The taxpayer or a related person suffering from a serious illness or disability
• An eligible relocation of the taxpayer or the taxpayer’s spouse or common-in law partner (ei generally a relocation that enables the taxpayer to carry on business, be employed or attend full-time post-secondary education)
• An involuntary termination of the employment of the taxpayer or the taxpayer’s spouse or common-law partner
• The insolvency of the taxpayer
• The destruction or expropriation of the property.

As of the time of writing some of the exemption criteria are quite broad and not fully defined. For example, what constitutes serious illness or disability, what defines eligible threat to the safety etc? Further clarification from the government is expected in early 2023.

The intent of the new rules is to tax the individuals who buy and sell the properties for profit and not to punish individuals or families who are selling due to unforeseen life changing events.

If the property was held for more than 365 days and not deemed a principal residence the question of facts will determine if the sale will be taxable as business or capital gains.

For more information please check the Government of Canada website or commentary by Grant Thornton.

For the advice, please contact your accountant and tax lawyer. The information presented is only of a general nature, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice.