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House flipping i.e., the practice of buying a house with the intention selling it for a profit in the near future, has been an extremely lucrative endeavour in Canada over the past decade as housing prices skyrocketed across the nation. Taxpayers involved in house flipping will need to consider the application of the new anti-flipping rules in effect for sales starting January 1, 2023, as outlined below.

Overview

Three distinct tax treatments are available to taxpayers on the sale of a home:

1. No tax – The home was held as capital property (i.e., not inventory) of the taxpayer generating a capital gain on which the taxpayer could, subject to certain conditions and a technical formula under the Income Tax Act (the “Act”), claim the principal residence exemption. In some cases, house flippers have abused the principal residence exemption to pay no tax on the flipped home by moving into it prior to the sale.
2. Approximately 26% tax (highest tax bracket in Quebec for a capital gain) – The home was held as capital property of the taxpayer generating a capital gain on which the principal residence exemption cannot be claimed. House flippers have in certain cases improperly reported their profits (intentionally or unintentionally) to take advantage of the preferential tax rate afforded to capital gains in Canada.
3. Approximately 53% tax (highest tax bracket in Quebec for regular income) – The home was held as inventory of the taxpayer generating fully taxable ordinary business income. This is generally the correct tax treatment when house flipping is undertaken as a business or commercial activity. House flippers have avoided reporting their profits as fully taxable ordinary business income due to its unfavorable tax treatment.

Tracking the sale of homes across Canada and ensuring that profits are properly reported has been a difficult task for the fiscal authorities. This led to the introduction of Canada’s new anti-flipping rules that were enacted with the stated goal of ensuring house flippers properly report profits and pay their fair share of taxes. Additionally, this measure (along with the recent ban on foreign home buyers and the new Underused Housing Tax) seeks to ameliorate the housing affordability crisis in Canada by removing speculation from the real estate market.

How the New Anti-Flipping Rules Work

To make sure house flipping is more often properly reported, the new anti-flipping rules deem a gain from the sale of a “flipped property” to be income from a business i.e., fully taxable as ordinary income. This eliminates the possibility of taxpayers claiming capital gains treatment with respect to their profit on the disposition of “flipped property”.

Furthermore, the new rules deem “flipped property” to be inventory of the taxpayer. The classification of the property as inventory prohibits the taxpayer from claiming the principal residence exemption, as said exemption can only be claimed on houses held as capital property of a taxpayer.

Lastly, the new anti-flipping rules make it impossible for a taxpayer to realize a business loss on the disposition of “flipped property”.

Definition and Exceptions

New subsection 12(12) of the Act provides the definition of “flipped property” as a housing unit of the taxpayer that:

• is located in Canada;
• is capital property of the taxpayer; and
• was owned by the taxpayer for less than 365 consecutive days prior to the disposition of the property.

In other words, the sale of a house located in Canada owned by a taxpayer for less than 365 consecutive days will be deemed to generate business income and be fully taxable. However, there are many exceptions provided in the definition of “flipped property” excluding sales that can reasonably be considered to occur due to, or in anticipation of, one or more of the following events:

1. Death: death of the taxpayer or person related to the taxpayer;
2. Addition to the household: one or more persons related to the taxpayer becoming a member of the taxpayer’s household (e.g., birth, adoption, elder parent moving in);
3. Breakdown of marriage: 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;
4. Personal safety: a threat to the personal safety of the taxpayer or a related person;
5. Illness or disability: the taxpayer or a related person suffering from a serious illness or disability;
6. Moving for work: an eligible relocation (as defined in the Act) of the taxpayer or the taxpayer’s spouse or common-law partner;
7. Termination of employment: an involuntary termination of the employment of the taxpayer or the taxpayer’s spouse or common-law partner;
8. Insolvency: the insolvency of the taxpayer; or
9. Involuntary disposition: the destruction or expropriation of the property.

Taxpayers will not automatically be able to claim capital gains treatment by simply holding a home for more than 365 consecutive days prior to the disposition, rather the already applicable tests to determine if a sale is on account of capital or income (inventory) continue to apply.

Taxpayers involved or interested in house flipping should contact their advisors to review the application of the new rules.