Speculation in the housing market has been contributing to the rapid increase in housing prices in recent years. Also called “flipping,” speculation occurs when someone purchases a home, then resells shortly thereafter to try to make a profit.
In an effort to make homes more affordable, the Federal Government is seeking a reduction in flipping transactions. So, the 2022 Budget included a measure to try to discourage flipping: a tax on 100% of the profits from the disposition of flipped properties. On January 1, 2023, the Income Tax Act (ITA) was amended to implement the anti-flip tax.
The ITA, s. 12(12) states that the sale proceeds from a flipped property are deemed business income, so the taxpayer is taxed on 100% of the sale proceeds. Before the anti-flip tax was implemented, the sale proceeds from a flipped property were, in many cases, deemed capital gains, so the taxpayer was only taxed on 50% of the sale proceeds.
- 12(13) of the ITA defines a “flipped property,” and sets out some exceptions to the definition. Generally, a flipped property is a residential unit located in Canada that the taxpayer owned for less than 365 consecutive days. The anti-flip tax applies whether the taxpayer lives in the property or not.
A property is not a flipped property if the taxpayer disposes of the property after owning it for less than 365 days due to, or in anticipation of, one of the following events:
- The taxpayer or a person related to the taxpayer dies;
- The taxpayer becomes a member of the household of a related person, or related persons; or a person related to the taxpayer becomes a member, or persons related to the taxpayer become members, of the household of the taxpayer (e.g., the taxpayer has a child, or decides to house an elderly family member);
- The taxpayer’s marriage or common-law partnership breaks down, and the taxpayer has been living apart from their partner for at least 90 days before the disposition of the property;
- The taxpayer, or a person related to the taxpayer, is facing a threat to their personal safety;
- The taxpayer, or a person related to the taxpayer, is suffering from a serious illness or disability;
- The taxpayer, or the taxpayer’s spouse or common-law partner, qualifies for an eligible relocation for employment purposes (see the ITA, s. 248(1));
- The taxpayer, or the taxpayer’s spouse or common-law partner, has their employment involuntarily terminated;
- The taxpayer becomes insolvent; or
- The property is expropriated or destroyed.
If you are considering purchasing or selling an income property, be sure to consider whether the anti-flip tax will impact you. Always seek tax advice before entering into an Agreement of Purchase and Sale.
For further information on the tax implications of disposing of real property, see the Capital Gains Guide, and the webpages Report your real estate income and Tax effects of buying real estate to sell for a profit.
This blog post was written by Shannon Hogan, a member of the Real Estate team. She can be reached at 613-369-0369 or at shannon.hogan@mannlawyers.com.
