With rising interest and energy costs, more real-estate investors are expected to sell in 2023. These investors need to watch out for the Anti-Flipping Tax that comes into effect on January 1, 2023.
The Anti-Flipping Tax is deeming rule that taxes profits from flipping residential real estate owned for less than 12 months as business income rather than capital gains. In Canada, capital gains are taxed favourably. Only 50% of the capital gains get included in taxable income and taxed.
What is the new anti-flipping tax?
The anti-flipping rule applies to a housing unit in Canada owned by the taxpayer for less than 365 consecutive days before the sale (referred to as the “Flipped Property”)
In such cases, the gain on the sale of the flipped property is treated as business income, not capital gain.
There are exemptions
The anti-flipping rule does not apply where a taxpayer was required to sell due to, or in anticipation, of one or more of the following events:
- Death of the taxpayer or a person related to the taxpayer
- Related person(s) became a member of the taxpayer’s household, or the taxpayer became a member of a relayed person
- Breakdown of marriage or common-law partnership if the taxpayer has been living separate and apart for at least 90 days before the sale
- Threats to personal safety
- Serious illness or disability
- Relocation to be 40 KM closer to work (employment or business) or to study at a post-secondary institution.
- Involuntary termination of employment of the taxpayer or spouse/common-law partner
- Insolvency
- Destruction or expropriation
Cannot claim losses on a Flipped Property
With the real estate market declining, some investors may suffer a loss. However, the Anti-Flipping Tax does not allow you to claim a loss on a Flipped Property.
With historically low mortgage interest rates in early 2022 and the red-hot real-estate market, many investors invested in residential rental properties, especially condos. If these investors are looking to sell their investments, they need to be careful of the Anti-Flipping Tax because they may not have held onto the property for over 12 months. In such cases, it may be prudent to wait before selling, but you should speak to a tax advisor as the gain could still be treated as business income, regardless.
What is the anti-flipping tax?
The anti-flipping rule applies to a housing unit in Canada owned by the taxpayer for less than 365 consecutive days before the sale (referred to as the “Flipped Property”)
In such cases, the gain on the sale of the flipped property is treated as business income, not capital gain.\
Application to assignment sales
The 2022 Fall Economic Statement proposed to extend this deeming rule to gains from the sale of the rights to purchase a residential property via an assignment sale. Profits arising from an assignment sale would be deemed to be business income if the rights to purchase a property were assigned after having been owned for less than 12 months.
The 12-month holding period will reset once the taxpayer owns the property subject to the purchase and sale agreement. This will ensure that taxpayers cannot bypass the anti-flipping tax when selling a constructed property simply because a taxpayer held the rights to purchase the property before it was constructed. In other words, the 12-month holding period would reset once a taxpayer secures ownership of the property.
Investors who signed onto pre-construction projects in 2023 may look to assign the agreement to purchase to someone else. The anti-flipping rule also applies to these arrangements.
There are exemptions
Yes. The anti-flipping rule does not apply where a taxpayer was required to sell due to, or in anticipation, of one or more of the following events:
- Death of the taxpayer or a person related to the taxpayer
- Related person(s) became a member of the taxpayer’s household, or the taxpayer became a member of a relayed person
- Breakdown of marriage or common-law partnership if the taxpayer has been living separate and apart for at least 90 days before the sale
- Threats to personal safety
- Serious illness or disability
- Relocation to be 40 KM closer to work (employment or business) or to study at a post-secondary institution.
- Involuntary termination of employment of the taxpayer or spouse/common-law partner
- Insolvency
- Destruction or expropriation
Cannot claim losses on a Flipped Property
With the real estate market declining, some investors may suffer a loss. However, the Anti-Flipping Tax does not allow you to claim a loss on a Flipped Property.
What does this mean for investors?
With the Anti-Flipping Tax coming into effect in 2023, Investors looking to sell could end up with an unexpected tax bill. It may be prudent to hold onto the property for at least 365 days before selling. However, we advise you to consult with your tax advisor as, in some cases, your gain may still be treated as business income, even if you held onto it for 365 days.
