DFK Tax Newsletter

Residential Property Flipping Rules

Property flipping is when an investor purchases a property with the intention of selling for a profit in a short period of time. The residential property flipping rules were first announced in the 2022 Budget. Along with other measures, this rule was introduced with the objective to make housing more affordable across Canada. The residential property flipping rules were also brought forward to address the concern that profits from the sale of flipped properties were being reported as capital gains, as opposed to business income, and, in some cases, the principal residence exemption being claimed. 

The new rules apply to any dispositions, on or after January 1, 2023, of a housing unit or a right to acquire a housing unit located in Canada. If the property being sold was owned for less than 365 days prior to the sale, the gain on disposition is deemed to be fully taxable as business income.  The principal residence exemption would not be available. If the disposition resulted in a loss, the loss would be deemed to be nil.

In contrast, if these rules did not apply, the gain on disposition could be considered to be a capital gain which is only 50% taxable or potentially tax-free if it meets the conditions for the principal residence exemption.

There are a number of exceptions to these changes in tax treatment. If it can be reasonably considered that the disposition occurred due to, or in anticipation of, one of the following events the new rules will not apply.

• Death of the taxpayer or related person,
• A related person joining the taxpayer’s household or the taxpayer joining a related person’s household (new child, care for an elderly parent),
• Breakdown of a marriage or common-law partnership,
• Threat of personal safety of the taxpayer or related person,
• The taxpayer or related person suffering from a serious illness or disability,
• An eligible relocation of work, 
• Involuntary termination of employment of the taxpayer or spouse/common-law partner,
• Insolvency, or
• Destruction or expropriation of the property.

Consider an individual who purchased a condo in January 2024 and moved in that month. The condo was to be the individual’s home. The individual received an unsolicited offer in December 2024 to sell the condo at a profit. The individual had no previous real estate sales history or property ownership. The individual decided to accept the offer and take advantage of the opportunity to use the profit to buy a slightly larger condo in the same building. The sale transaction closed that same month. Since the property was owned less than 365 days prior to the sale, the individual would be subject to the residential property flipping rules and any gain on the sale would be fully taxable as business income.

Consider the same individual and scenario except that the individual was expecting their first child in 2025. If it can be reasonably be considered that the disposition occurred in anticipation of the birth of the new baby, one of the exceptions to the rule could apply.  This would mean that the sale could be considered to be a capital gain and the principal residence exemption available if the conditions were met.

It will take time before there is precedent and commentary by the CRA to determine how the terms ‘reasonably’ and ‘in anticipation of’ should be interpreted under these rules. Both of these terms could potentially allow for more broader interpretation of the exceptions.

The application of the flipped property rules is not limited to individuals. Corporations should consider the impact of these new rules if a residential property is sold within 365 days following an amalgamation, windup or transfer from related party.

It is well known that CRA has increased its focus on real estate transactions over recent years.  These new rules provide an additional opportunity for the CRA to review sale transactions that take place.  As outlined above, if a property has been owned for less than 365 days prior to the sale and it does not meet one of the exceptions, these new rules will apply regardless of the taxpayer’s intention. These new rules remove consideration of intention and other factors, such as nature of business/profession of the taxpayer, factors that motivated the sale and frequency/number of sale transactions, that would normally be reviewed in determining if a sale is on account of income or capital.  If one of the exceptions above is being relied upon, the taxpayer should be prepared to provide support for this.

Laura Simmonds, CPA, CA
Tax Partner, MRSB Group
Charlottetown, PE