Help Your Clients Who Flip Properties Stay Ahead of the Taxman

Starting January 1 of this year, if Canadians buy a new home and then sell it within 365 days, 100% of any profit from that sale is subject to business, not capital gains, taxes.

The new law is a tweak to existing legislation intended to curb house-flipping. You probably know that’s the practice of purchasing (and possibly fixing up) a home, then reselling it soon after at a profit.

Sometimes a very big profit.

The home in question doesn’t even need to be built. If your client owns the contract on a preconstruction home then resells it within a year, these new rules apply. The sale is what matters. And here’s why.

It’s widely accepted among the public that house-flipping drives up prices, especially in busier markets. The practitioners - aka flippers - are regularly the subject of scorn in the press, though what they’re doing is perfectly legal.

Many of them are your clients. Here’s how to look after them.

Homeowner or corporation? The tax implications are wide-ranging and worthy of inspection.

Let’s repeat the key point: any profit is subject to business tax if a property in Canada is resold within one year (fewer than 365 consecutive days).

The ramifications? If the home is in the seller’s name, the marginal tax rate on that flipped property’s profit can be as high as 53.5%!

Consider some of the profits flipped properties have produced in Canada’s largest cities (where about 80% of the population lives) especially these recent years. For more perspective: according to the website Statista, the average price of a Canadian house in 2022 was $704,875. Compare that to just $567,332 two years earlier in 2020.

In many markets, that ceiling of 53.5% tax on 100% of the profit is easily attainable from a single resale. No need for further flipping.

If the buyer is a corporation, however, the profit becomes business income and is charged 12.2% corporation tax on the profit - as opposed to the possible 53.5% charged to a homeowner. That’s a big spread in tax rates, and vital for your clients to be aware of if they’re planning a flip.

Especially if it’s been nearly a year since purchase. Maybe wait a few days or weeks.

Even if the seller claims this was their principal residence, the year-long rule applies.

The Canada Revenue Agency (CRA) employs twelve criteria to determine what is an actual principal residence. And as mentioned, Canadian anti-flipping legislation already existed but there was an exception: if the property was the flipper’s principal residence, only 50% of the profit was subject tax.

That’s because profit on a principal residence’s sale is considered a capital gain and not the business transaction of a flip, whose profit - forgive the repetition but it clarifies things - is subject to 100%.

The government decided too many flippers were using principal residence status as a loophole. That’s the point of the minimum 365-day residency. It discourages, at least, immediate flipping.

But what about those genuine new homeowners who, unexpectedly, must resell within a year of moving in?

There are nine exceptions to the tax allowed by the CRA and they all stem from unforeseen changes in circumstances. From death or divorce to loss of employment or the need to relocate for a new job, their list looks after those suddenly in tough straits.

What about those property flippers who incur a loss after reselling within 365 days?

Any loss can be applied against income, likely producing tax savings. However, if the sale is a principal residence, that loss is halved before applying. It’s the reciprocal of the 50% capital gains taxes they’d have paid in the case of a profit.

How does all this affect your practice?

On top of your usual conveyancing work, depending on whether your clients stand to earn a profit or suffer a loss on their flip, they may also need quick help incorporating, creating partnerships, or even officially converting their corporate space into a regular Canadian’s primary residence.