November 2022 Newsletter

If you buy a home or condo, and then sell it soon after you get title — certainly if it’s within 18 months or so — the CRA will usually consider that you have “flipped” the property, and that any gain is fully taxed as business profit, not half-taxed as a capital gain. This also means that you don’t get the principal-residence exemption, even if you moved into the home, because the exemption is available only for capital property, not for business inventory. And if you had the intention — or even a “secondary intention”— of selling the home at the time you agreed to buy it, then the CRA will be legally correct.

The same is the case if you build your own home and the process takes some years, and you sell the home soon after it’s ready for occupancy — even if you move in first.

In practice, you need to wait about 3-5 years before selling, to be reasonably sure the CRA will not consider your gain to be business income. Your personal background will be very relevant here: if you or family members are in the construction or real estate business, or if you have sold multiple properties in recent years, the CRA is far more likely to presume that any property you purchased was bought with the intention of resale.

Legally the test is what your original intention was, but CRA auditors will generally reject explanations of “changes in circumstances”, as every taxpayer can come up with reasons why they had to sell the home despite having “intended to live there”.

However, if you can genuinely prove your original intention as well as the change in circumstances, it’s often possible to convince a CRA auditor or Appeal Officer, or failing that a Tax Court judge, that the home really was capital property and thus that you qualified for the exemption. This will normally require showing that the home or condo was specifically chosen or designed for your family, and had special features that wouldn’t normally be in a home that was bought with the thought of resale.

Some taxpayers are clearly in the “business” of flipping homes. They buy and sell many properties, sometimes renovating, sometimes moving in for a while and then not reporting the gain because they think the principal‑residence exemption applies. The CRA goes after these taxpayers, and may assess them for income tax on their profit, plus GST or HST on the new home (including the land value), plus interest, plus substantial penalties. Of course, real estate records are permanently and publicly available, so the CRA can always find out who bought a property, when and for how much. And if the CRA believes that a taxpayer deliberately or negligently failed to report income, there is no time limit for the CRA to reassess the taxpayer. This is also the case if you didn’t report the sale at all, even if the omission was innocent.

These rules are now going to get a bit more stringent. New rules for the Income Tax Act, announced in general in the April 2022 Budget, and released as draft legislation on August 9, 2022, will provide that a gain on a “flipped property” is always business income. (This will not apply to a loss, only to a gain.)

The term “flipped property” will be defined as any residential property that you own for less than 365 consecutive days, and that otherwise would be capital property. However, there will be an exception if you sold the property for any one of a number of listed reasons, such as: a death or addition to the family; marriage breakdown; serious illness or disability; insolvency; being fired; moving more than 40km closer to a new job; or a “threat to personal safety”.

This change to the Income Tax Act will not really change the law very much. As explained above, if you own a home for less than a year before selling it, CRA Audit will almost always assess you for business profit anyway. In fact, this change may benefit taxpayers, because it may make it easier to argue that a property held for more than one year is capital property, and it may make it easier to argue that one of the listed “change in circumstances” exceptions applies so that the property is not “flipped property”. However, you still would need to meet the original test of the property being capital property — i.e., not purchased with the intention or secondary intention of resale.

The new rules will have an effect on compliance, however: they tell taxpayers and tax preparers not to report a disposition after less than 1 year as a capital gain or to claim the principal‑residence exemption, unless they can claim that a listed exception applies. A tax preparer who takes part in such a claim, while knowing that the property is “flipped property”, is at risk of being assessed a third-party penalty. Also note that, since 2016, a gain on a principal residence must be reported for the principal-residence exemption to apply; before 2016 you could simply not report at all, taking the position that the property was your principal residence, and leave it to the CRA to try to find you.

Finally, note that under both the existing rules and the new law, if you buy a condo pre-construction, wait (say) four years, and then get title, then quickly sell the property, CRA will take the view that you “owned” the condo for only a short time. However, two Tax Court decisions, Gosai (2020) and Wang (2021), both held that the time should be measured from when you signed the binding agreement to buy the condo.

Last modified on November 1, 2022 12:00 am
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