Profits on a real estate property may be taxed as business income or capital gains, depending on the transaction details. If the Canada Revenue Agency (CRA) determines that the transaction is for business purposes, the profit is taxed fully as business income. On the other hand, if the profit from a property sale is considered an investment gain, only half of the profit is subject to tax as capital gains.
If the property is your primary home, the sale may qualify for the principal residence tax exemption, meaning any capital gains will not be taxed. To qualify for the principal residence tax exemption, you are required to meet certain conditions and show proof to the Canada Revenue Agency (CRA) that the property sold was your primary home. When filing your taxes, you must report the primary residence property sale and any capital gains.
If you do not meet the primary residence exclusion tax requirements, the CRA may deem any profits from your property sale as capital gains or business income, which may be subject to tax.
New Property Flipping Rules
Under the Income Tax Act (ITA) Subsection 12(12), the Canada Revenue Agency considers property flipping to be reselling a purchased property or reselling the rights to purchase a property within a short period from the purchase to make gains.
Generally, a flipped property is not classified as a taxpayer’s inventory and does not meet the 12-month holding period. A holding period of less than 12 months indicates that the property was only owned for less than 365 consecutive days before a deemed sale.
The 12-month holding period condition may be waived under certain circumstances, such as in the event of death, the birth or adoption of a child, assuming care of aged parents, dissolution of a marriage or common-law partnership, a threat to the personal safety, severe disability or illness, job loss, qualifying relocation for business or employment purposes, insolvency, or property destruction.
Starting January 1, 2023, the CRA treats property flipping profits as business income instead of capital gains. This means that flipping a property to make profits will result in the total gain being taxed, unlike the 50 percent tax on capital gains. Also, profits from flipped properties do not qualify for the personal residence exception.
The new deeming rule also applies to profits from the disposition of the rights to purchase residential property through an assignment sale. Profits are treated as business income if the rights to purchase property were assigned before the end of the 12-month holding period. The 12-month holding period resets after a taxpayer secures ownership of the property.
It is also important to note that if your flipped property sale results in a business loss, this loss is deemed to be nil.
Reporting Your Property Sale Transactions
The CRA pays significant attention to audit and tax compliance in the real estate sector to prevent speculative real estate transactions and curb increasing housing prices. When assessing your tax reports, the CRA considers factors such as the type of property you sold and how long you owned it, your history of selling similar properties, any renovations done on the property, your intention in buying the property and why you sold it. Use form T2125 Statement of Business or Professional Activities to report business income from a flipped property sale. For more information on filing property profit tax, Contact DW & Associates Chartered Professional Accountants to avoid incorrect tax filings and tax penalties.