Residential Property Flipping Rule in Canada

The Residential Property Flipping Rule is a new tax measure introduced by the Canadian government to address speculative real estate practices and promote housing affordability. Under this rule, profits from the sale of residential properties held for less than 365 days are fully taxed as business income, regardless of the intention behind the purchase.

This guide provides a detailed explanation of the Residential Property Flipping Rule, including its purpose, how it works, the exceptions to the rule, and practical examples to help property owners and investors navigate this important change.

What Is the Residential Property Flipping Rule?

The Residential Property Flipping Rule is a tax measure designed to ensure that individuals who buy and sell residential properties within a short period pay their fair share of taxes. The rule applies to residential properties owned for less than 365 days, taxing the entire profit as business income rather than as a capital gain.

This distinction is significant because capital gains are taxed at only 50% of the profit, while business income is fully taxable. The rule aims to deter speculative real estate flipping and stabilize the housing market by discouraging short-term transactions.

How Does the Rule Work?

If you sell a residential property that you have owned for less than 365 days, the profit from the sale is treated as business income. This means the entire profit is added to your taxable income for the year, subject to your applicable tax rate.

Example:

• Purchase Price: $400,000
• Sale Price: $500,000
• Profit: $100,000

If the property was held for less than 365 days, the $100,000 profit is considered business income. If your marginal tax rate is 30%, you would owe $30,000 in taxes on the profit.

Under the previous rules, if the sale were treated as a capital gain, only 50% of the profit ($50,000) would be taxable, resulting in a tax liability of $15,000. The new rule effectively doubles the tax burden on property flipping.

Exceptions to the Rule

The Residential Property Flipping Rule recognizes that not all short-term property sales are speculative. Certain life circumstances may require an individual to sell their property within 365 days. The following exceptions apply:

• Change in Employment: A job relocation that makes it impractical to continue living in the property.
• Health Issues: The need to sell due to medical conditions or the need to provide care for a family member.
• Divorce or Separation: A relationship breakdown requiring the sale of the property.
• Death: The death of the property owner or a family member.
• Involuntary Disposition: Events such as a natural disaster or expropriation by a government authority.

To claim an exception, you must provide evidence to the Canada Revenue Agency (CRA) demonstrating that the sale was necessitated by one of these circumstances.

Properties Affected by the Rule

The rule applies to all residential properties, including:

• Single-family homes
• Condominiums
• Townhouses
• Duplexes

It does not apply to non-residential properties, such as commercial or industrial real estate.

Implications for Principal Residence Exemption

Under the Residential Property Flipping Rule, individuals cannot claim the principal residence exemption for properties sold within 365 days of purchase. This means the entire profit is taxed as business income, even if the property was your primary residence during the ownership period.

Practical Examples

Scenario 1: Speculative Flip

John buys a townhouse for $300,000, renovates it, and sells it six months later for $400,000. The $100,000 profit is taxed as business income. Assuming a marginal tax rate of 35%, John owes $35,000 in taxes.

Scenario 2: Job Relocation Exception

Emily buys a condo for $500,000 and sells it eight months later for $550,000 due to a job transfer to another province. Emily provides documentation of the job relocation to the CRA, qualifying for an exception. The $50,000 profit is not automatically treated as business income, and the usual tax rules apply.

Scenario 3: Principal Residence Sold Quickly

Mark buys a single-family home for $700,000 and sells it within 11 months for $750,000. Under the new rule, Mark cannot claim the principal residence exemption. The $50,000 profit is fully taxed as business income.

How to Report Profits Under the Rule

If the Residential Property Flipping Rule applies to the sale of your property, follow these steps to report the profit as business income:

1. Calculate the Profit: Subtract the purchase price, eligible expenses, and selling costs (e.g., legal fees, realtor commissions) from the sale price.
2. Include in Business Income: Add the profit to your taxable income for the year.
3. File Your Tax Return: Use the appropriate sections of your tax return to report the profit as business income.
4. Maintain Documentation: Keep all records related to the purchase, renovation, and sale of the property to support your tax filing.

Tips for Compliance

1. Understand the Rules: Familiarize yourself with the Residential Property Flipping Rule to determine if it applies to your situation.
2. Keep Accurate Records: Maintain detailed records of purchase and sale agreements, renovation expenses, and supporting documents for exceptions.
3. Consult a Tax Professional: If you’re unsure how the rule applies to your property sale, seek advice from a tax expert.
4. Plan for Tax Liabilities: Set aside funds to cover potential tax liabilities from property sales.

Conclusion

The Residential Property Flipping Rule introduces significant tax implications for individuals who sell residential properties held for less than 365 days. By fully taxing profits as business income, the rule aims to curb speculative flipping and promote housing affordability. Understanding the rule, its exceptions, and how to comply with CRA requirements is crucial for property owners and investors.

For expert assistance with navigating the Residential Property Flipping Rule or other tax matters, contact BOMCAS Canada at info@bomcas.ca or visit BOMCAS Canada. Our team of professionals is here to help you stay compliant and make informed decisions about your real estate investments.