As first discussed in our 2022 Federal Budget Commentary, Finance proposed to introduce a new rule that will tax gains arising from the disposition of a “flipped property” (including a rental property) as ordinary income. Draft legislation was released August 9, 2022, by Finance and if it receives royal assent, the new rule will apply to dispositions that occur after 2022.
The draft legislation specifies that gains from the sale of a flipped property are deemed to be realized from a business carried on by the taxpayer throughout the period the flipped property is owned, and it is deemed not to be capital property. Therefore, property sales subject to the new rule will be fully taxable as ordinary income. As a result, gains on flipped property will not be eligible for the 50% income inclusion rate applicable to capital gains and the resulting income inclusion is not eligible for the principal residence exemption. Although Finance is proposing to tax gains from the sale of a flipped property, the rule doesn’t apply to dispositions that result in a loss.
A flipped property is defined in the draft legislation as a housing unit that is located in Canada that was owned by a taxpayer for less than 365 consecutive days prior to the disposition of the property. The definition of flipped property has a number of exclusions and does not include dispositions that reasonably can be considered to have occurred due to one or more of the following events:
- the death of the taxpayer or a person related to the taxpayer;
- one or more persons related to the taxpayer joining the taxpayer’s household or the taxpayer joining the household of a related person;
- the breakdown of the marriage or common-law partnership of the taxpayer if the taxpayer has been living separate and apart from their spouse or common-law partner for at least 90 days prior to the disposition;
- a threat to the personal safety of the taxpayer or a related person;
- the taxpayer or a related person suffering from a serious illness or disability;
- an eligible relocation of the taxpayer or the taxpayer’s spouse or common-law partner, if that definition was read without reference to the requirements for the new work location and the new residence to be in Canada;
- an involuntary termination of the employment of the taxpayer or the taxpayer’s spouse or common-law partner;
- the insolvency of the taxpayer; or
- the destruction or expropriation of the property.
Even though a property meets one of the above noted exceptions or if it is held for more than 365 days, any gains from disposition may still generate either business income or a capital gain depending on the original intention of the taxpayer for the acquisition. The 365-day test and exceptions above are only applicable to the residential property flipping rule and do not apply for other purposes of the Income Tax Act that still may tax a gain from disposition on account of income. Therefore, taxpayers should continue to document their original intention and use for the property even though the new rule may not be applicable.
Resources
Draft Legislation – Residential Property Flipping Rule
Explanatory Notes – Residential Property Flipping Rule
The information in this article is of a general nature and is in summary form. Contact one of our tax professionals to discuss these matters in the context of your situation before acting upon such information.
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