Canada's Residential Property Flipping Rule: What Ontario Sellers Need to Know

The residential property flipping rule applies to properties sold on or after January 1, 2023. It is found in subsections 12(12) to 12(14) of the federal Income Tax Act. A "flipped property" is a housing unit in Canada, or a right to acquire one, that you owned or held for less than 365 consecutive days before you disposed of it.

When a sale of a flipped property produces a gain, the law deems you to have carried on an "adventure or concern in the nature of trade". The property is treated as business inventory rather than capital property for the whole time you owned it. In plain terms, the profit is taxed as business income.

The rule applies to everyone, including individuals, corporations and trusts. It covers houses, condominiums, townhouses, duplexes and similar housing units, and it covers the right to buy one, such as a pre-construction purchase agreement.

Capital gains and business income are taxed very differently:

• Capital gains: generally only half of the gain is added to your income.
• Business income: 100% of the profit is added to your income and taxed at your marginal rate. In Ontario the top combined federal and provincial rate is 53.53%, compared with 26.76% on a capital gain at the top bracket.
• Principal residence exemption: because a flipped property is treated as inventory instead of capital property, the exemption generally cannot be used to shelter the profit. See our guide to the principal residence exemption in Ontario.
• Losses: if you lose money on a flipped property, the law deems your business loss to be nil. You cannot use that loss against other income.

The rule covers a "right to acquire" a housing unit. If you sign an agreement to buy a pre-construction condo or home and assign that agreement to someone else less than 365 days after you acquired the right, the profit on the assignment can fall under the rule. If you instead close the purchase, the 365-day count generally restarts from the date you take title, and you then hold the property itself.

Assignments can also raise separate GST/HST questions. Those depend on whether the home is new or substantially renovated and on who is assigning. See our article on the GST/HST new housing rebate, and speak with a lawyer before you sign an assignment.

The rule does not apply if the sale happens because of, or in anticipation of, one of the following events. The Act lists them:

• The death of you or a related person.
• A related person joining your household, or you joining a related person's household (for example, a new child or an elderly parent).
• The breakdown of your marriage or common-law partnership, after living separate and apart for at least 90 days.
• A threat to your personal safety or that of a related person, such as the risk of domestic violence.
• A serious illness or disability of you or a related person.
• An eligible relocation, such as a move for work or school that meets the distance rule.
• Involuntary termination of your employment.
• Insolvency (for example, bankruptcy or a consumer proposal).
• Destruction of the property, or its expropriation.

Selling after 365 days takes you outside the flipping rule, but it does not guarantee capital gains treatment. Courts have long applied a separate test: was the purchase an "adventure in the nature of trade"? The CRA looks at your intention when you bought, how long you held the property, how often you buy and sell, whether you renovated it, how you financed it, and whether you have a history of quick resales.

A buyer who purchased a property mainly to renovate and sell at a profit can be taxed on business income after 18 or 24 months, and an investor who buys a number of properties and sells them soon after may face the same result. Your intentions must be supported by what you actually did.

The CRA has said publicly that it reviews real estate transactions, including the sale of properties held for short periods. A review letter may ask for your purchase and sale agreements, lawyer's statements, renovation invoices, mortgage documents and your reasons for selling. If you did not report the sale correctly, the CRA can reassess you and add arrears interest and, in some cases, penalties.

If the CRA reassesses you, you generally have 90 days from the date of the notice to file a notice of objection (individuals may have longer in some cases). See what to do if you receive a CRA reassessment.

• Reviewing your facts to decide whether the 365-day rule or an exception applies.
• Responding to a CRA audit or information request so that you give accurate information on time.
• Preparing a notice of objection, and appealing to the Tax Court of Canada if the CRA confirms the reassessment.
• Where you filed incorrectly, assessing whether a voluntary disclosure may be available. See voluntary disclosures.
• Planning future purchases and sales so the tax result is clear before you sign.