For some Canadians, house flipping, which is when a person buys properties, renovates them and then sells them for a profit, can be a lucrative form of investment. While house flipping can be very profitable, it also has some strict tax implications and financial risks to consider — especially in light of some recent new laws.
This article will examine how viable house flipping is as a way to generate income and lay out the new tax rules that could significantly impact the future of this activity.
What Is House Flipping In Canada?
House flipping is when a person (either a professional builder or amateur investor) purchases a house not with the intention of living in it but rather of renovating it and then selling it to a new buyer at a profit. With house flipping, a property is seen as an investment strategy rather than as a home in which you plan to live for years. For flippers, the goal is to find an undervalued property and then update it as cost-effectively as possible so that it can be sold for a hefty profit.
So how can you spot the difference between someone buying a home in which they intend to live versus a house flipper? The Canadian Revenue Agency defines house flipping as: “…a housing unit located in Canada, that is not already considered to be inventory of the taxpayer and was owned by the taxpayer for less than 365 consecutive days prior to the disposition (12-month holding period)…”
Exception To The Rule: When Can You Sell Your Home Less Than A Year After Buying
Of course, there are some legitimate reasons that an individual may need to sell their home less than a year after buying it and the government has been careful to add exceptions for extraordinary life circumstances that could lead to the quick buying and selling of a home, including:
- Death of the homeowner
- A birth of a child or adoption or addition of an elderly relative
- Divorce or separation
- Severe disability or illness
- Job loss
- Job relocation
- Personal bankruptcy
Introduction To Anti-House Flipping Tax Rules In Canada
Over the last few years, however, due to the housing crisis, flipping has received some negative press because many feel that buying and selling homes as an investment strategy artificially heats up the housing market and makes homeownership even more out of reach for many Canadians. Critics argue that house flippers, particularly professional flippers for whom reselling homes is a major source of income, take affordable fixer-uppers off the market and make it more difficult for first-time homebuyers and those with modest incomes to enter the market.
Furthermore, what made property-flipping so attractive and lucrative was that some people were wrongly reporting the profits as a capital gain (which are only taxable at 50%) and, in some cases, also claiming the principal residence exemption (where the gain is not taxed), which is only meant for homes, not properties that are quickly bought and resold for profit.
In 2023 the Canadian government introduced new tax legislation designed to slow speculative house flipping. As of January 1, 2023, profits from the sale of houses that are held for less than 12 months are now considered business income and, as such, would be subject to full taxation as business income, rather than being eligible for the less onerous capital gains tax.
How Are These House Flipping Rules Different Than Before?
At its essence the rules have not really changed in that if you were buying, renovating and then quickly selling a home which was not your main residence, you were supposed to be paying full taxes on the profits, rather than enjoying a preferential capital gains rate of 50%. However, the problem was that some unscrupulous individuals were inappropriately reporting the profits as a capital gain and, in some cases, claiming the principal residence exemption. Furthermore, the onus was generally on the CRA to prove that the individual intended to flip the house for profit.
To curb this dishonest behaviour, the new legislation addresses this issue by very clearly laying out a definition of flipping (a home held for less than 12 months barring some exceptions) and treating profits from properties sold within 12 months as fully taxable business income. The new rules also more clearly prevent the use of the principal residence exemption for properties sold within 12 months of purchase, unless certain major life events (such as death or divorce) precipitated the sale.
What Is The BC Home Flipping Tax?
British Columbia has also introduced its own home flipping tax in an effort to cool the housing market and make home ownership more affordable. As of January 1, 2025 there will be a tax on residential properties sold within 730 days (two years) of purchase. The tax rate is 20% of any profit earned from a property sold within 365 days, decreasing gradually to zero on day 730.
Does Ontario Have A Anti-Flipping Tax?
Ontario does not have its own province-specific anti-flipping tax. Rather, house flippers in Ontario must abide by the federal anti-flipping rules introduced by the Canadian government in 2023, which treat profits from residential properties sold within less than 12 months after purchase (with a few exceptions) as fully taxable business income. British Columbia is currently the only province with its own anti-flipping rules.
Is House Flipping Profitable? Tax Rules To Consider
The profitability and tax implications of flipping a house will depend on a variety of factors, including a person’s tax bracket, whether or not they are a sole proprietorship or an incorporated business, and any deductions or credits that an individual or business can claim. Here are some tax rules to consider:
- The profits made from flipping a property are fully taxable as business income based on your tax bracket. They do not qualify for the 50% capital gains inclusion rate or principal residence exemption.
- If your annual profits exceed $30,000 per year, you’ll need to register for the GST/HST and collect and remit HST/GST.
- Deduction and credits: Sole proprietors and corporations have different tax responsibilities and deductions they can potentially claim. Depending on your type of business, in some cases expenses such as renovation costs, marketing and legal fees may be deducted from taxable income.
- You’ll need to fill out a T1 tax form if you’re a sole proprietor or a T2 form if you’re a corporation, so it’s essential to understand the differences between these two forms and when each is required.
How Does Cra Know If You Sold A House?
Let’s just say that the Canada Revenue Agency takes keeping an eye on the selling of properties in Canada very seriously, especially when it comes to primary residences. While the primary residence exemption allows Canadians to avoid paying capital gains tax on the sale of their main home, many people don’t realize that it’s their obligation to report the sale of any property, including a primary residence, to the CRA.
When you sell your home you are actually required to submit official forms to the CRA, such as Form T2091(IND), Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust). Many Canadians (flippers and non-flippers alike) do not understand their obligations and fail to promptly and accurately report home sales. The CRA is aware of this oversight and, for this reason, it often does audits on the Canadian real estate sector by monitoring tax compliance on property transactions. In fact, these audits are a large source of income for the CRA so it’s wise to ensure you adhere to all tax laws and regulations to avoid penalties.
The CRA monitors real estate transactions through a variety of sources, including reviewing land title records, tax audits of individual taxpayers, information collected from lawyers, banks and real estate agents and more. If you’re not sure of your responsibilities when selling a home, it’s worth reaching out to the CRA so you don’t get penalized.
Bottom Line
House flipping in Canada can still be a lucrative way to earn income but only if you fully understand your tax obligations and responsibilities. To stay on the right side of the CRA it’s vital to report profits correctly and pay taxes accordingly. That being said, the new federal anti-house flipping tax rules (as well as the British Columbia home flipping tax) will likely make it harder for some flippers to make a huge profit.
