Navigating the Flipped Property Rule: What Canadian Real Estate Investors Need to Know

In the ever-evolving Canadian real estate market, understanding the complexities of property taxation is more important than ever, especially with the Canada Revenue Agency (CRA) and Revenu Québec intensifying their scrutiny of real estate transactions. With the federal government committing $73.1 million to strengthen enforcement over the next five years, investors and homeowners alike must ensure tax compliance in the housing sector. In this article, we’ll provide a comprehensive overview of the flipped property rule, its key effects, and advanced tax strategies to avoid unexpected liabilities.

Introducing the Flipped Property Rule: Key Changes for 2023 and Beyond

In the 2022 Federal Budget, new rules specifically targeting flipped residential properties were introduced and came into force on January 1, 2023. Under these changes, “property flipping”—the act of purchasing and reselling homes within a short period for profit—faces stricter tax treatment. Now, any gain on a property sold within 365 days of purchase is classified as business income, meaning it is fully taxable and ineligible for preferential capital gains rates or the principal residence exemption. Furthermore, any corresponding losses are denied, with only reasonable expenses permitted as tax deductions.

Key Takeaways:

• Properties sold within 12 months of purchase are automatically deemed to be flipped unless an exception applies.
• Gains are taxed at your full marginal rate as business income, not as capital gains.
• The principal residence exemption does not apply.
• Losses cannot be claimed, except for reasonable selling expenses.

For more on tax compliance and reporting, visit our Tax Services page.

Exceptions to the Flipped Property Rule

While the flipped property rule is broad, there are notable exceptions to protect Canadians from unforeseen personal or financial hardships. Exceptions include:

• Force majeure events such as death, marital breakdown, family additions (e.g., birth, adoption), serious illness or disability, insolvency, job relocations, involuntary termination, personal safety threats, or government expropriation.
• Legislative update (August 2024): Property transfers upon a beneficiary’s death are now excluded from the flipped property rule.

Each exception must meet strict documentation and substantiation requirements. If you’re unsure whether you qualify for an exception, consulting a Chartered Professional Accountant is highly advisable.

What Activities Can Be Caught by the Flipped Property Rule?

The rule applies to a wide range of scenarios, impacting both individuals and corporate entities:

Corporate Transactions

1. Amalgamations: If two corporations amalgamate and one holds a residential property for less than 365 days, the transaction is deemed a taxable disposition—taxed as business income, not a capital gain.
2. Corporate Wind-ups: When a parent corporation receives residential property from a subsidiary held for less than 365 days and the subsidiary is wound up, this too is taxed as business income.
3. Section 85 Rollovers: Transfers of residential property to a related corporation under section 85 of the Tax Act for properties held less than 365 days are also caught. The same applies to individual-to-corporation transfers.
4. Estate Freezes: Estate freezes involving real property require a careful analysis to determine if the flipped property rule is triggered, especially if the property was acquired less than 365 days before the transaction.

Note: In all these examples, the 365-day clock resets with each new transfer.

For further guidance on advanced tax planning, explore our Tax and Estate Planning services.

Technical Insights: How the CRA Determines Intent

While the flipped property rule applies to properties held for less than 365 days, it’s essential to recognize that CRA may still deem a disposition to be business income even if you held the property longer, based on the facts and circumstances. Factors include frequency of transactions, renovations, financing arrangements, and your stated intentions.

Strategic Guidance and Professional Advice

Navigating these complex rules requires precision and expertise. The line between capital gains and business income can be razor-thin and fact-dependent. For any real property transaction—especially those involving corporate structures or family trusts—consult a Chartered Accountant for tailored advice. At Kreston GTA, our experienced team of tax advisors and CPAs are ready to help you achieve full compliance and optimize your tax position.

Contact us today at info@krestongta.com.

How Kreston GTA Can Help You Succeed

At Kreston GTA, we understand the pressure on financial reporting teams and real estate investors in this dynamic landscape. Whether you need help with tax planning, impairment testing, or sophisticated estate strategies, our team of audit and advisory professionals is here to support you. We offer:

• Personal and Corporate Tax Preparation and Advice
• Advanced Tax and Estate Planning
• Comprehensive Real Estate Transaction Support
• Access to a Nationwide Network of Experts

For more insights, visit our Insights & Resources section.

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Frequently Asked Questions (FAQ)

1. What is the flipped property rule in Canada?
The flipped property rule treats gains on residential properties sold within 12 months of purchase as fully taxable business income, disallowing capital gains treatment and principal residence exemption except in certain cases.

2. Are there exceptions to the flipped property rule?
Yes. Exceptions include major life events like death, job relocation, marital breakdown, disability, and certain legislative-transfers, such as upon a beneficiary’s death.

3. How does the rule affect corporate property transactions?
Amalgamations, wind-ups, rollovers, and estate freezes involving properties held less than 365 days are considered business income events, with the 365-day period resetting upon each transaction.

4. Can I claim a loss on a flipped property?
No, losses on properties deemed to be flipped are denied except for allowable selling expenses.

5. Is the 365-day rule the only factor the CRA considers?
No, even after 365 days, the CRA can still classify a property sale as business income based on intent and transaction details.