Tax Tip Thursday

We’ve got some new rules possibly coming for 2023 that you will probably want to know about sooner than later.

The federal government announced anti-flipping measures in their latest budget, released this past spring. These measures will apply to any home or rental residential property held for less than 12 months and subsequently sold on or after January 1, 2023. Any profits earned on these sales will be treated as business income.

The federal government is cracking down on certain individuals who are engaged in flipping residential real estate and not properly reporting these sales as business income.

Flipping has been defined in government documents as “purchasing real estate with the intention of reselling the property in a short period of time to realize a profit.” On August 9, 2022, draft legislation was introduced setting out the government’s new anti-flipping rules to take effect in 2023.

What, exactly, is property flipping?

Property flipping is a popular practice for real estate investors. The process involves buying a property, usually at a low price, maybe making some improvements, and then selling it soon afterward for a higher price. While flipping can occasionally result in a genuine bargain for the buyer, it often leads to spiraling prices and artificial shortages in the housing market.

Essentially, where a property is owned for 12 months or less, the new rules treat these properties as business income, not capital, meaning that homeowners selling at less than the year mark will pay full tax on the appreciation in value, as opposed to the 50% they would pay if the property was treated as capital.” Not only are these changes designed to better protect Canadians from financial losses, but they also aim to prevent criminals from using house-flipping as a way to launder money, something that has been widely reported as a growing, nationwide concern.

Under the proposed new rules, where there has been a disposition of a “flipped property,” any gain realized is taxable as business income and not as a capital gain. As such, the PRE will not be available, and the entire gain is taxable as 100% business income. A flipped property is defined as a housing unit in Canada that was owned for less than 365 consecutive days before its disposition. Exceptions to the definition exist for several life events including:

• the death of the individual or a related party,
• an addition to a household,
• breakdown of a relationship,
• a threat to personal safety,
• serious illness or disability,
• work relocation or termination,
• insolvency or destruction or expropriation of the home.

The anti-flipping rules will apply to dispositions of homes after 2022.

The proposed rules effectively set out a bright line test for a gain being ineligible for the PRE and 100% of the gain included in income, without the taxpayer’s intention being relevant. That being said, taxpayers who hold properties longer than 12 months with the intention of not satisfying the strict definition of a “flipped property” when selling could still find themselves the subject of a CRA audit based on the current rules, which disallow capital gain (and PRE) treatment if the intention was to flip the home.

Will you be affected by these changes?

If not, that’s great! If so, or if you’re not 100% sure, you should call us today. We will help you review the proposed changes and your plans to minimize the impact this could have on you.

Disclaimer:

This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.