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On December 15, 2022, Bill C-32 received Royal Assent which included the new residential property flipping rules. This new rule aims to ensure profits from flipping residential real estate are subject to full taxation and not eligible for capital gains treatment or the principal residence exemption.
Previous Legislation
A gain on sale of residential property by an individual may have been considered as business income, which is subject to full taxation. In some cases, it may have been classified as a capital gain, which is subject to tax on one half of the gain. The principal residence exemption has previously been available to those who qualify, which could be used to reduce or eliminate tax on the gain.
Historically, it has been a point of contention whether the gain on sale of a residential property should be treated as business income or a capital gain. The courts generally relied upon the taxpayer’s intention at time of purchase, length of time the property is held, and factors that motivated the sale when determining the appropriate treatment. In cases where a property had been owned less than 2 years, the courts have often treated the gain as business income, subject to full taxation.
Updated Legislation
Effective January 1, 2023, where a residential property is owned for less than 365 days, the disposition will automatically be considered a disposition of flipped property and treated as business income. In the event where a business loss arises, it will be denied and cannot be deducted against other income. The rule also applies to residential condominium or single unit residential complex assignment sales made by an individual.
There are some exceptions to this new rule, for example in the event that the disposition arises due to certain life events such as the death of the individual or related party, marriage breakdown, financial hardship and so on.
In the event of a sale of residential property, it is always good practice to document and discuss the tax position with your professional advisor. GST/HST implications should also be considered. New GST/HST legislation regarding assignment sales is discussed in our blog post here: GST/HST on Assignment of New Housing Agreements
It is important to note that the new legislation regarding flipped property does not replace the previous distinguishment between business income and capital gain. For property sold outside of the 365-day period, it is still a question of fact whether the gain on sale of a residential property should be treated as business income or a capital gain. For property sold within a 365-day period, the new legislation makes the conclusion much clearer and may help reduce enforcement time and costs for CRA.
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