The Residential Property Flipping Rule: Understanding 2023 Changes 0

Posted On December 7, 2023, by Ann-Marie Powell

The real estate landscape is ever evolving, especially for investors, condominium enthusiasts, and “home flippers”. As taxation rules adapt, understanding the ramifications concerning property flipping becomes critical.

1. What is property flipping?

Property flipping involves buying residential property in Canada, primarily with the intention of a quick (less than one year) resale for profit. It includes both tangible properties and the resale rights for a property before the actual transaction occurs.

There are a couple of key factors included here. One is the timeframe: a property may be considered to have been flipped if owned by the taxpayer for less than the 12 month holding period, however even if it is held more than 12 months, if the intention is to make a profit then it may also be considered a flipped property. Another factor is the taxpayer’s line of work: some occupations are taken into consideration in the determination of whether or not a property is considered to have been flipped.

There are some exceptions, for specific life events, including:

  • Death of the taxpayer or related person
  • A growing household (i.e. birth, adoption, care of elderly parent)
  • Breakdown of a marriage or common-law partnership of taxpayer (with conditions)
  • Threat to the personal safety of the taxpayer or related person
  • Disability or illness
  • Specific types of employment change (i.e. involuntary termination of taxpayer, eligible relocation of taxpayer)
  • Insolvency of the taxpayer
  • Destruction or Expropriation of the property

2. What is changing?

Starting January 1, 2023, profits from selling flipped properties will be exclusively recognized as business income. This ensures profits are not regarded as capital gains and cannot benefit from the Principal Residence Exemption.

3. What if my property was sold at a loss?

Losses from selling flipped properties are considered null under the new rules. A business loss cannot be reported on flipped properties.

4. What are the GST/HST Implications?

We also need to consider the GST/HST implications on the sale, depending on use of the property during the holding period.

For those who deposit for a condominium or a single-family home and engage in a purchase agreement with a builder but later sell their interest to a third party without finalizing the original purchase, they’ll be impacted by the new rules. If an assignment agreement postdates May 7, 2022, these individuals will fall under this new guideline.

The first purchaser, who made the initial deposit and entered into a contract with the builder, now has to remit GST/HST to the CRA via a special return when selling their property interest to the eventual buyer.

Finally, if you substantially renovate a property (>90%), you are considered to be a builder and the sale of the residential property is considered to be a taxable supply subject to HST and the income is treated as business income.

5. What are the consequences and penalties associated with misreporting?

Misreporting in real estate sales can lead to a CRA audit, which are increasingly common. Factors considered during an audit include property type, ownership duration, prior sales, work done on the property, reasons for selling, and initial buying intention.

Gains from sale of residential property that are not accurately reported as business income could be subject to gross negligence penalties as well as interest charges.

With the dynamic shifts in real estate taxation, continuous education is essential. Regardless of whether one is a seasoned investor or a newbie, grasping these rules ensures more informed decisions and adept real estate dealings. As always, due to the distinctiveness of each situation, it is advised to consult professionals when faced with such circumstances.

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This blog is not meant to provide specific advice or opinions regarding the topic(s) discussed above. Should you have a question about your specific situation, please discuss it with your GBA advisor.

GBA LLP is a full-service accounting firm in the Greater Toronto Area, but we primarily service all of Ontario as well as the rest of Canada virtually, except Quebec. Our team of over 30, provides Audits and Reviews of financial statements, and Compilations of financial information, as well as corporate tax returns. We provide specialized corporate tax and succession planning for small and medium businesses, in addition to general advisory services.

If you would like to schedule a call to discuss your accounting or tax needs with one of our team members, please complete the free no obligation meeting request on this page.

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