Anti-Flipping Tax: Canada's New House Flipping Rule

Jan 30

What Is the New House Flipping Tax?

The new house flipping tax was introduced on January 1, 2023, to target people who were avoiding taxes on flipped properties. Previously, some house flippers were classifying profits as capital gains to avoid paying the correct taxes.

In addition to this new rule, the Canada Revenue Agency (CRA) is increasing the number of audits related to flipped properties. It’s important to understand the new rule to avoid paying penalties and interest, whether you’re an experienced flipper, builder, or renovator.

What Is Considered a Flipped House?

Under the new rule, a “flipped property” is any residential property that:

Is located in Canada
Was purchased with the intention of making a short-term profit
Was owned by the taxpayer for less than 365 consecutive days before the sale of the property

Any gains on these properties are considered business income and fully taxable. No principal residence exemption is available to reduce the tax.

The rule only applies to gains, which means you cannot report a business loss on a flipped property.

It wasn’t included in the original Bill C-32, but the Fall Economic Statement 2022 proposes to extend this rule to gains arising from assignment sales. Anyone who owns the rights to a pre-construction residential property and sells those rights would have to pay the new tax as well.

The same rules would apply to an assignment sale as a fully flipped house in order to pay the tax: you must have owned the rights for less than 365 days and made a profit.

How Much Is the House Flipping Tax?

If you bought your property with the intention of flipping, assignment, or buying to build and sell, your profits on the sale of the property will be taxed as business income under this new rule.

The exact rate will depend on how much money your business generated throughout the year and which province your business is located in.

For example, if you bought a home to flip that was $400,000, put $100,000 worth of renovations into it, then sold it for $600,000, your profit would be $100,000 before tax.

Assuming a net tax rate of 15%, you would pay $15,000 in tax under the new tax rule, making your final profit $85,000.

What Is the Difference Between Normal Property Tax & Flipped Property Tax?

A normal property would likely be a primary residence and would be excluded under the primary residence exemption. If this is the case, you won’t pay any tax on gains.

Note that you can only have one primary residence. And even if a home was your primary residence for the duration of ownership, any home that is bought and sold within one year is considered a flip under the new rules.

There is no single way to determine whether gains on residential properties should be treated as business income or capital gains under the Income Tax Act. Here are the factors the courts consider when deciding on this issue:

The person’s intention with the property at the time of purchase
The nature of the business, profession, calling, or trade of the person and their associates (i.e., do they flip houses regularly)
Whether borrowed money was used to finance the property purchase and the financing terms
The length of time the property was held
The reason for selling

This list doesn’t have every factor a court may consider, but it gives you an idea as to which properties would be considered flips. If your business or full-time job is related to real estate, it’s more likely that the profits from a home sale would be considered business income by the CRA.

How Can I Avoid Property Flipping Taxes?

Exemptions to the property flipping tax may be considered, depending on the reasons for selling the home. Certain life events that may qualify you for an exemption include:

Death of the owner or a related person
Related person joining the household (birth of child, adoption, or care of elderly parent) or the owner is joining a related person’s household
Divorce or separation of a common-law partnership (if living apart for at least 90 days prior to the disposition)
Disability or serious illness of the owner or a related person
Certain relocations of the owner or their spouse/common-law partner (a relocation for work where the new home is at least 40 km closer to the new work location)
Involuntary termination of employment of the owner or the owner’s spouse/common-law partner (fired, laid off, etc.)
Bankruptcy or financial insolvency of the owner
Damage, destruction, or expropriation of the property against the owner’s will (due to a natural disaster or other uncontrollable events)

While there are certain exceptions to this new rule, the exceptions exist for unforeseen circumstances and shouldn’t be used as a method to avoid paying taxes.

Can You Still Flip a Property in Canada?

Yes, you can flip properties in Canada, even with this new tax. That said, you should expect to pay this tax if you’re flipping a house.

Incorporate the tax into your budget for the flip, as there will be a smaller margin for profit with this added expense.

What Are the Penalties for Non-Compliance?

If you don’t pay the appropriate tax on your flipped property, you might have to pay penalties in addition to the tax. If the CRA finds that you did not pay the taxes correctly, you could be given a gross negligence penalty equal to 50% of the additional taxes owed, in addition to interest charges.

If you think you filed your taxes incorrectly on a flipped property, you might qualify for a reduced penalty under the CRA’s Voluntary Disclosure Program. In order to qualify, you must notify the CRA before any CRA enforcement action has started.

Do You Have to Pay GST Too?

You might also be required to charge GST/HST on the sale, depending on what the property was used for between the original purchase and sale.

If you’re considered a “builder” under the Excise Tax Act, the property may also be subject to GST/HST. This includes situations where significant renovations were done.

Additionally, the sale of a residential condominium or single-unit residential complex through assignment is taxable for GST/HST, regardless of the original reason for purchasing the property.

Get the Right Advice Before You Flip a Property

Under the new rule, any property that is bought and sold within a year will be considered a flipped property. Any gains will be taxable as business income unless one or more of the exemptions apply.

Before you purchase a property, it’s important to have the right advice from experienced professionals. The mortgage brokers at Spire Mortgage have worked with countless house flippers, builders, and property investors, so we can help you make the right mortgage decisions for your situation.

Renee Huse