Changes to the taxation of profits from real estate flipping

Since January 1, 2023, the Government of Canada has corrected the tax treatment of real estate flipping by amending the Income Tax Act. The Government of Québec has also announced its intention to adopt this new measure, although the related provisions have not yet been published.

Under the new measures, the sale of properties held for less than 365 days is fully taxed as business income, except for unforeseen life event exemptions. It is therefore be impossible to benefit from the principal residence exemption or to tax the profits generated by the sale as capital gains.

If 365 continuous days have elapsed between the time the taxpayer becomes the owner of the residential property and its disposition, it will remain a question of fact as to whether the profits from the sale should be taxed as business income.

Exemptions:

The residential real estate flipping rule will not apply when a transaction is carried out due to at least one of the following events:

  • The death of the taxpayer or a person related to the taxpayer
  • One or more persons related to the taxpayer become members of the taxpayer's household or the taxpayer becomes a member of the household of a related person
  • The breakdown of the taxpayer's marriage or common-law partnership if the taxpayer has been living separate and apart from their spouse or common-law partner for a period of at least 90 days before the disposition
  • A threat to the personal safety of the taxpayer or a related person
  • The taxpayer or a related person has a serious illness or disability
  • An eligible relocation of the taxpayer or the taxpayer's spouse or common-law partner (i.e., a relocation that allows the taxpayer to operate a business, carry on employment or pursue full-time post-secondary education, for example)
  • Involuntary termination of employment of the taxpayer or their spouse or common-law partner
  • Taxpayer's insolvency
  • Destruction or expropriation of property

Obligations of licensees

Licensees must henceforth verify if their clients have owned the residential property for sale for less than 365 days.2 In this case, they must inform their clients of this new tax rule2 (without applying the law to their situation, but referring them to a tax expert if necessary3).

Finally, while real estate flipping is a legitimate activity, failing to report income or filing false returns with tax authorities is illegal. In the course of a transaction, licensees must not in any way advise or encourage a party to engage in tax evasion4 and if they become aware of any such intention on the part of a client, their brokerage contract shall be terminated. In the absence of a brokerage contract, the business relationship should end immediately.

Last updated on: September 27, 2023
Numéro d'article: 264820