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Canada’s New Anti-Flipping Tax – will it affect you?

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New flipping tax – What does it mean?
Effective this month, the government’s new tax: anti-flipping tax is scaring many investors. This is one of the measurements to cool the real estate market prices. The new residential property flipping rule, introduced in Budget 2022, is now law. This rule was included in Bill C-32, which received Royal Assent on December 15, 2022. 
In recent years, home prices in Canada have been skyrocketing, especially in major urban centres like Vancouver and Toronto. This has led to a situation where many people are buying homes not to live in them, but to “flip” them – that is, to sell them at a higher price shortly after purchase. This speculation has made it very difficult for first-time homebuyers to enter the market, and has contributed to an overall increase in housing prices.

The Canada Revenue Agency (CRA) has already been investigating and enforcing residential real estate that was being flipped or assigned and not properly reported as business income.  Essentially, house flippers have been using the Primary Residence Exemption to avoid or reduce taxes.
The new tax law puts an end to using the PRE as an option and will flat-out disallow the use of the principal residence exemption to shelter the capital gain realized on the sale of your home if you’ve owned it for less than 12 months.

This new law includes everyone selling a home within less than 365 days after its purchase, even if you lived there. Keep in mind that there are exceptions which include a certain number of 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.
What happens if your sale is considered a flip? You will pay taxes on the revenue you made as any regular business would. How are gains on residential property ordinarily treated for tax?  

When an individual sells a residential property, depending on the situation, the gain is treated as fully taxable business income or as a capital gain, which is 50% taxable. If the property qualifies as a principal residence the gain may be reduced or eliminated by claiming the principal residence exemption. 

Aside from the new residential property flipping rules, there’s no other rule to determine whether the gain on the sale of a residential property should be treated as business income or a capital gain, under the Income Tax Act. Instead, it’s a question of fact, and the courts have considered the following factors when deciding this issue:  
– the taxpayer’s intention regarding the property at the time of purchase 
– the nature of the business, profession, calling, or trade of the individual and their associates 
– the extent to which borrowed money was used to finance the acquisition and the financing terms arranged  
– the length of time the real estate was held 
– the factors motivating the sale. 
Note that this list isn’t exhaustive, and any of the factors by itself isn’t conclusive. However, the closer the individual’s business or occupation is related to real estate transactions, the more likely the gain on a sale would be considered business income by the CRA.   

Since every situation can be specific, this article should not be relied upon as legal, financial, or tax advice.  We strongly encourage you to speak with a qualified accountant to determine specific implications, if any, to your situation.