As of January 1, 2023, new legislation came into effect that may impact you. If you have purchased a property you are now looking to sell within the last 12 months, you may be impacted by this new legislation. To ensure you are aware of what your obligations are, we are recommending that you seek advice on your upcoming transaction from a professional accredited accountant.
Here is an excerpt that sets out the new Anti-Flipping rules, written by Jason Rosen & Marrie Shirzada from Rosen Kirshen Tax Law.
New Anti-Flipping Rules
The proposed anti-flipping measure would apply to residential properties sold on or after January 1, 2023. This new measure was announced in the federal budget released on April 7th, 2022. In the document, the federal government attributes the high housing prices partly to property flipping – buying a house and selling it within a short period for much more than what was paid for originally. The proposed measure attempts to ensure that the profits from flipping residential real estate are subject to full taxation, thus leading to a fairer outcome for all Canadians.
Generally, when an individual sells a property, the profits from the sale are considered capital gains and thus, only 50% of the gains from the sale are taxed. Additionally, there is a principal residence exemption for individuals selling their primary residence. However, profits from flipping properties are fully taxed and not eligible for either capital gains inclusion or the principal residence exemption.
Currently, to categorize the proceeds of the sale of a residential property as business income the Canada Revenue Agency (the “CRA”) needs to show that the taxpayer intends to flip the property in the pursuit of profit. However, the proposed anti-flipping measure eliminates the CRA’s burden to prove this intention.
Exceptions to the New Anti-Flipping Rules
There are exceptions to the proposed anti-flipping rules that would apply to taxpayers who sell their homes within 12 months due to certain life circumstances. The government added, that where the property being sold is because of certain changes in circumstances, the sale would not automatically result in business income. A non-exhaustive list is as follows:
• Changes in life circumstances;
• Births of children;
• New Job;
• Divorce;
• Death;
• Disability; or
• Other circumstances not yet known (the new legislation may or may not contain a detailed list).
Where any of the above apply, it would be a question of fact as to whether the property sale resulted in business income, a capital gain, or a capital gain that was eligible for the Principal Residence Exemption. This question of fact will be reviewed by an auditor in a property sale audit. These have been going on for years and because of the exceptions provided, they will likely continue for many years to come.