With some exceptions, profits from residential property held for less than 12 months, will now be taxed as business income.
When the Minister of Finance introduced the 2022 Federal Budget, there were several income tax measures aimed at curbing the escalating prices of residential real estate. One such measure, titled the “Residential Property Flipping Rule”, was introduced to increase the tax applied to residential property held for a time period of less than 12 months. This new tax measure establishes that the profits from property sold on or after January 1, 2023, that have been held for a time period of less than 12 months, will be taxed as business income. There are several exemptions to this rule for life events as reviewed further in this article.
Residential Property Flipping Rules (“RPFR”)
Prior to the implementation of this rule, some taxpayers were treating the profits from the sale of a residential home held for less than 12 months as capital gains. Such a tax filing position was fraught with uncertainty and subject to Canada Revenue Agency (“CRA”) audit and possibly reassessment of income tax. In addition, where the homeowner resided in the disposed property for such a short timeframe, the taxpayer may have sought to claim the principal residence exemption to eliminate any tax liability from the gain. Thus, the taxpayer’s exposure to CRA audit and possible tax reassessment was increased. If the principal residence exemption was not applicable, the gain on the property may be on account of income (100% of gain taxable) or on account of capital where only 50% of the profit from the sale would be taxable. In order for the taxpayer to defend its principal residence exemption claim, the taxpayer would have to prove that the taxpayer ordinarily inhabited the property and the taxpayer did not have the primary or secondary intention to dispose of the property in pursuit of profit.
Under the updated RPFR regime, profits from the sale of a residential property held for less than 12 months will be considered flipping, regardless of any renovations undertaken, and the profits will be taxed as business income. Within this timeframe, the capital gain tax treatment or the principal residence exception would no longer be applicable, and taxpayers’ intention is no longer relevant.
Life Circumstances Exceptions
The following life circumstances allow individuals to sell their residential property within 12 months to possibly preclude the resulting gains taxed as business income:
- 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 (if the new home is at least 40 kilometres closer to new work location)
- Involuntary termination of employment
- Involuntary disposition (i.e. due to natural disaster)
What about residential properties sold subsequent to 12 months?
If a taxpayer disposes of a residential property subsequent to 12 months, it does not mean the disposition is automatically afforded capital gains treatment and the potentially available principal residence exemption. Whether such favourable tax treatment is available is highly dependent on the facts and whether CRA may view such a disposition as “an adventure or concern in the nature of trade”. When there is any doubt, it is imperative that you seek professional tax advice from your tax advisor concerning income tax implications surrounding the disposition of residential property.
How Bateman MacKay Can Help
The tax specialists at Bateman MacKay have the expertise and qualifications to help with various corporate and personal tax matters inclusive of the RPFR. Contact our team today for professional guidance on a wide range of tax issues.
The original article was published on BatemanMackay.comwebsite, on April 20, 2023.