Canada’s New Anti-Flipping Tax
The housing market in Canada has skyrocketed over the years. The average Canadian finds themselves renting because of high housing prices. In an attempt to cool off the market, the Federal government is proposing an anti-flipping measure. This would mean that Canadians selling a home or rental residential property that they’ve held for less than 12 months will be considered flipping and consequentially, the profits from the sale will be considered business income.
This forms a significant change where taxpayers used to be able to sell homes quickly claiming capital gains and/or the Principal Residence Exemption.
New Anti-Flipping Rules
The proposed anti-flipping measure would apply to residential properties sold on or after January 1, 2023. This new measure was announced in the federal budget released on April 7th, 2022. In the document, the federal government attributes the high housing prices partly to property flipping – buying a house and selling it within a short period for much more than what was paid for originally. The proposed measure attempts to ensure that the profits from flipping residential real estate are subject to full taxation, thus leading to a fairer outcome for all Canadians.
Generally, when an individual sells a property, the profits from the sale are considered capital gains and thus, only 50% of the gains from the sale are taxed. Additionally, there is a principal residence exemption for individuals selling their primary residence. However, profits from flipping properties are fully taxed and not eligible for either capital gains inclusion or the principal residence exemption.
Currently, to categorize the proceeds of the sale of a residential property as business income the Canada Revenue Agency (the “CRA”) needs to show that the taxpayer intends to flip the property in the pursuit of profit. However, the proposed anti-flipping measure eliminates the CRA’s burden to prove this intention.
Exceptions to the New Anti-Flipping Rules
There are exceptions to the proposed anti-flipping rules that would apply to taxpayers who sell their homes within 12 months due to certain life circumstances. The government added, that where the property being sold is because of certain changes in circumstances, the sale would not automatically result in business income. A non-exhaustive list is as follows:
- Changes in life circumstances;
- Births of children;
- New Job;
- Disability; or
- Other circumstances not yet known (the new legislation may or may not contain a detailed list).
Where any of the above apply, it would be a question of fact as to whether the property sale resulted in business income, a capital gain, or a capital gain that was eligible for the Principal Residence Exemption. This question of fact will be reviewed by an auditor in a property sale audit. These have been going on for years and because of the exceptions provided, they will likely continue for many years to come.
If you have any questions or need any assistance regarding the new proposed anti-flipping measure, or any tax matter, please feel free to contact us today! We are here to help!
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.