What residential property owners need to know about Canada’s new anti-flipping rules

How will the new measure affect residential property owners?

Previously, when an individual sold a residential property that was held for personal use or to generate rental income, the profits were considered capital gains. If the property was the “principal residence” of the homeowner, the owner could claim the principal residence exemption to eliminate any tax arising from the gain. If the owner was not able to claim the principal residence exemption, the tax rules allowed for only 50 percent of the gains from the sale to be taxed.

In order for the profit from the sale to be fully taxed as business income, the Canada Revenue Agency (CRA) generally needed to prove that the property was not the principal residence of the owner, or that the seller’s primary intention of acquiring the property was to flip the property in the pursuit of profit.

Under the new anti-flipping rules, the profits from the sale will be fully taxed as business income if the seller has held the property for fewer than 12 months (subject to a number of exceptions). This means the sale of the property within this time frame will generally no longer be eligible for either capital gains tax treatment or the principal residence exemption — and the CRA no longer has a burden to prove that the seller had the primary intention of acquiring the property to make a profit from flipping the property.

What are the exceptions?

Exceptions to the new anti-flipping measure are available to individuals who sell their residential property within 12 months. These exceptions include:

• Death
• Addition to household (including birth, adoption, or of elderly parent)
• Breakdown of marriage or common-law partnership
• Threat to personal safety
• Serious illness or disability
• Work relocation (new home must be at least 40 kilometres closer to new work location)
• Involuntary termination of employment
• Insolvency
• Involuntary disposition (e.g., due to natural disaster)

Such exceptions are helpful to reduce the tax impact of the new rules for many homeowners, but it may be necessary to produce documentation to support the exception, and many other situations will fall outside of the exceptions.

Check if your sale will be impacted by the new tax

The anti-flipping rules introduce new considerations for Canadians who are thinking about selling their home or residential rental property starting in 2023. Before you put your property on the market, review the new measures enacted by the Federal Government to evaluate whether they will affect your sale. The new rules may also impact decision making for purchases of residential real estate, whether it be for personal use or investment purposes.

The CRA can assess significant penalties and interest for failure (under gross negligence) to report the gain on the sale of residential property as business income.