January 26, 2023
By: Matthew Boyd, Associate, Farber Tax Law
Effective January 1, 2023, new rules aimed to prevent house-flipping may apply to the sale of your home. A new rule will deem Canadian residential properties sold by taxpayers who held the properties less than 365 days to be a “flipped property”, unless the taxpayer can establish that they disposed of the property due to:
- The death of the taxpayer or someone related to the taxpayer;
- Changes to the composition of the taxpayer’s household;
- A breakdown of their marriage or common law relationship;
- A threat to the personal safety of the taxpayer or related person;
- Serious illness or disability;
- Bankruptcy or insolvency; or
- Destruction or expropriation of the property.
If the new rule applies, the entire gain from the sale will be taxed as business income and the principal residence exemption will be unavailable. In addition, if you do not report the gain from the sale of your home as business income, the CRA may impose penalties equal to 50% of the additional taxes owing.
It is important to recognize that the deeming rule moves in only one direction—even though it only applies to properties held for less than a year, there is a general principle that any sale can generate business income instead of capital gains if the taxpayer is considered to be speculating.
Unfortunately for taxpayers, there is no bright-line rule to know when proceeds from the sale of a home are business income or a capital gain. There are, however, many misconceptions. There are myths such as “if you live in a home for two years” or “if you change the address on your driver’s license to the new home’s address” the gain from the sale is tax free, or the gain is a capital gain. Taxpayers often do not realize these are misconceptions until it is too late. Therefore, taxpayers should consult tax professionals prior to reporting the gain from the sale of their real property. If a transaction is contested by the CRA, consult a lawyer at Farber Tax Law to plan your response.