As of January 1, 2023, the Canadian government introduced a new tax rule to prevent quick property flipping. If you buy and sell a home within a year (365 days), any profit you make will be fully taxed as business income, rather than as a capital gain. This applies to houses, condos, rental properties, and even the right to buy a home.
This rule also targets individuals who sell multiple properties in succession, claiming each as an exempt sale of a principal residence. However, the new rules don’t really change anything in this scenario. If a taxpayer has flipped properties and claimed each as a principal residence, or a capital gain, the law has always viewed those transactions as generating business income.
What is a Flipped Property?
A flipped property is any home in Canada that you own for less than 365 consecutive days before selling it. However, there are some exceptions where the rule won’t apply.
The definition of a 'flipped property' refers to a 'housing unit.' However, 'housing unit' is not explicitly defined in the legislation. This raises the question of whether an apartment building, as opposed to a single unit in the building, can be considered to be subject to the new rules.
Are There Exceptions?
There are some exceptions to the new rules. If you sell a property within a year due to any of these reasons, the new rule may not apply:
Death of the taxpayer or a close family member.
A new family member moving in (e.g., birth of a child or caring for an elderly parent).
Separation or divorce (at least 90 days apart before selling).
Safety concerns (e.g., domestic violence).
Serious illness or disability of you or a family member.
Losing your job.
Moving for work or school.
Bankruptcy or financial hardship.
Natural disasters or government taking over the property.
If your situation falls into one of these categories, your profit may not be taxed as business income.
How Will This Affect Taxes?
If your sale is considered a flip, your entire profit is taxed as business income.
You won’t get the 50% capital gains tax break.
You can’t claim the Principal Residence Exemption (which usually helps homeowners reduce taxes on the sale of their main home).
If you sell at a loss, you can’t use that loss to reduce your taxes.
What About Assignment Sales?
Many people purchase condo units prior to completion, and then sell the rights under the purchaser agreement, generating a profit. If you sell your right to purchase a home before taking ownership (an assignment sale) within the 12-month period, your profit will be taxed as business income.
Special Rules for Family and Business Transfers
If you inherit or receive a property from a relative and sell it within a year, you may still be subject to taxation under this rule. The 365-day countdown starts when you take ownership, even if your relative owned it for a long time before you.
For businesses, if a company amalgamates with another and sells a property within 365 days of the merger, the sale may be taxed as business income—even if the original company owned it for more than a year.
This is a departure from normal practice. In many situations, such as claiming a capital gains exemption, or the half-year rule for depreciation, the period of ownership by related parties is counted. In the case of the house flipping rules, the period of ownership of related parties is not included.
What Should You Do?
If you’re planning to buy and sell a property within a short period, be aware that you may face higher taxes. If you think you qualify for an exception, keep good records to show why you had to sell.
Planning ahead before acquiring or selling a home is much easier than trying to justify an exception after the fact.
As always, I am happy to work with your advisors in these situations.
--Chuck
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