The Government of Canada is tightening the rules surrounding the real estate market. New regulations, like a ban on foreign buyers and an additional vacant home tax in Toronto are becoming widespread as the Government looks to control the real estate market.
Another legislation that affects real estate investors is the new anti-flipping rules that went into effect on January 1, 2023. Understanding the basic principles of the new anti-flipping rules, the principal residence exemption, and how you can expect to be taxed as a flipper is important to remain in compliance with the CRA and lower your tax liability.
What is the New Anti-Flipping Rule?
The Government of Canada is attempting to reduce speculative demand and control the excessive growth that the housing market in Canada has experienced over the past few years. One avenue is through imposing an additional tax on house flippers.
The Government defines flipping as “purchasing real estate with the intention of reselling the property in a short period of time to realize a profit.” This definition encompasses many real estate investors that either hold property to leverage appreciation or remodel for a profit.
Understanding the Principal Residence Exemption
One of the exclusions to the anti-flipping rules remains principal residences. If the home qualifies as a principal residence, any capital gain realized upon disposition is tax-free. Obtaining principal residence status can be done by owning the home and living there for part of the year. However, if the main purpose of the home is to generate income, you will not qualify for the exemption, even if you do live there for part of the year.
Another way to tell if you qualify for the principal residence exemption is where you report income. Any income from the disposition of the house must have been recognized as a capital gain and not business income to qualify. The intention, time of purchase, time period held, and sale factors can all contribute to how the income is reported.
The Specifics of the Anti-Flipping Tax
There are additional tax implications if you don’t qualify for the principal residence exemption. When “flipped” property is disposed of, the gain is taxable as business income and not capital gain income. This can result in higher taxes, including self-employment taxes and ordinary income taxes.
This applies to all property held less than 365 days and did not qualify for the principal residence exemption. There are a few other exceptions including the death of the owner, the breaking of a relationship, serious illness, a threat to personal safety, work relocation, insolvency, and destruction of the home. House flippers that hold property over 12 months and report capital gain income may be more likely to receive a CRA audit.
The new anti-flipping tax will affect countless real estate investors that have begun taking advantage of the climbing housing market. To understand the impacts on your current situation, reach out to the team at NRK Accounting. We can help you navigate the new anti-flipping tax to minimize your tax burden going into the next year.