Do you know that CRA is implementing a new anti-flipping rule in 2023?
When you make a profit from the sale of a property that you own for less than 365 days, the profit you make is deemed to be business income, 100% of it is taxable.
If you own the property in your personal name, the profit you make can be subject to marginal tax rate as high as 53.5% tax. If the property is held in corporation name, the profit is taxed as active business income, subject to 12.2% corporation tax.
This rule also applies to principal residence, even if you had truthfully moved into the property before.
This rule also applies to assignment sale as well. If you purchase pre-construction home, and subsequently sell the contract as assignment AND you’ve own that assignment for less than 365 days, the profit you make, net of HST, is reported as income. 100% of the profit is taxable.
Your transaction could be excluded from this treatment if you meet one of the following criteria:
- Taxpayer died
- A related person joining the household
- Personal safety concern as a result of owning the property
- Illness or disability
- Moving for a qualified employment reason
- Being let go from your employment
- Destruction/expropriation of your property
It’s worthwhile to mention that just because you own the property for longer than 365 days (say 366 days), the profit you make from the sale of the property does not automatically qualify for capital gain treatment.
When sale of property is considered capital gain, only 50% of the profit is taxable. If you make $100K capital gain, only $50K is taxable.
In another words, just because you own the property for 366 days and more, it doesn’t mean that you automatically pay capital gain tax.
In addition to that, if you own the property for less than 365 days AND you incur a loss, the new rule still doesn’t apply. You do NOT automatically call the loss you incur from the sale of the property as a business loss.
When you incur business loss, you can use the business loss to offset other income. The business loss can be used to offset against your employment income or other ordinary income in your corporation dollar for dollar.
As a taxpayer, when you incur profit, you would prefer the transaction to be considered capital in nature. Profit you make is considered capital gain and only 50% of the profit you make is taxable. If you incur a loss, generally speaking, you would prefer the transaction to be considered as business loss. The loss you incurred is considered business loss and 100% of the loss can be used to offset against other income dollar for dollar.
If you have a capital loss, you can offset capital loss against capital gain ONLY. Because capital gain is 50% taxable, therefore capital loss is only 50% deductible. Not as beneficial as business loss – 100% deductible.
Now, it is often not easy to decide whether the sale of the property is considered capital gain/loss or business income/losses. Previous court cases have established a list of criteria to help taxpayer decides:
- Taxpayer’s intention
- Feasibility of taxpayer’s intention
- Geographical location & zoned use of real estate acquired
- Extent to which intention carried out by the taxpayer
- Evidence that the taxpayer’s intention changed after purchase of real estate
- Nature of the business, professional, calling or trade of the taxpayer and associates
- Extent to which borrowed money was used to finance the acquisition & the term of financing, if any, arranged
- Length of time of ownership
- Existence of other partners who share interest in the real estate
- Nature of the occupation of other investors involved in the deal and their courses of conducts
- Factors which motivated the sale of the property
- Evidence that the taxpayer and/or associates had dealt with extensively in real estate
CRA and the court do look at these criteria to conclude the nature of your transaction. It isn’t straight forward but those are the criteria.
With the new anti-flipping rule imposed for transactions happening from 2023 onwards, I’ve walked through the steps to evaluate the transactions in a flow chart in the following video:
If you still have questions or concerns about this new change, feel free to reach out to our office and our team is more than happy to assist you.
Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Your Real Estate Accountant