CRA Property Flipping Assessments: What You Need to Know
Introduction
The Canada Revenue Agency (“CRA”) recovered $1.4 billion as a result of audit activities related to real estate in Ontario from April 2015 to March 2023.[1] Since 2016, individuals must report the sale of their principal residence on their annual tax return[2] and in 2022 the Federal Government added a definition of “flipped properties” to the Income Tax Act [3]. With the CRA’s increased attention to the real estate sector, it is critical that real estate professionals and home owners understand the rules surrounding property flipping.
In this article, we explain property flipping, clear up the common misconceptions regarding the principal residence exemption, and outline the legal test for identifying when a flip has occurred. We also highlight why real estate professionals and contractors are particularly at risk of a property flipping reassessment.
If CRA has already contacted you about a purchase and sale, this article will help you understand the issue.
What is property flipping?
Property flipping occurs when someone purchases real estate with the intention of reselling it for profit. Even if this is not their primary intention, if making a profit on the sale was a secondary intention that motivated them to purchase the property, this can constitute a flip as well.
Where a person purchases a property and sells it within one year, the Income Tax Act will automatically consider this to be a flip with an intention of generating a profit. Only under certain personal circumstances, such as a death in the family, breakdown of a marriage, loss of employment, safety concerns, etc., will a person be able to demonstrate to the CRA that the sale should not be taxed as a flip.
Even where a property is sold more than one year after purchase, the CRA may still consider the sale to be a flip. CRA can also assess you tax on the first property you have ever bought and sold, or they may decide you are a property flipper after you have purchased and sold several properties, assessing you tax on each of the sales retroactively.
Determining whether you purchased the property with the intention of selling it for a profit requires CRA (and potentially a judge) to put themselves in your mind at the time you bought it. This can be an extremely frustrating and invasive experience for a taxpayer, especially because the CRA is entitled to make assumptions based on a taxpayer’s circumstances. Once CRA has issued a reassessment, it is up to you to prove that you did not intend to sell the property for profit when you acquired it.
Here are some examples of common types of property flipping:
Purchasing a property, fixing it up, and reselling it for a profit.
Purchasing a pre-construction property or building a property yourself and selling it for a profit when the project is complete.
Purchasing a property, demolishing it, and building a new home that is sold for a profit.
Tax consequences of property flipping
If the CRA determines that you have engaged in property flipping, it will tax you on your profit from the sale. This tax treatment is different from the treatment of a normal residence in several ways:
Your profits will not be sheltered by the principal residence exemption, even if you lived in the property for a certain period of time
Any gain on the sale will be treated as if it were inventory and not as a capital gain. This means that your profits will be taxed in full, instead of at the reduced capital gains rate.
CRA will charge you the GST/HST that they believe you should have collected on the sale of a property if:
you purchased a new-build and sold it without living in it, or
you substantially renovated the property before selling it.
The CRA will demand you repay any GST/HST rebate that you may have received when you initially purchased the property
On top of this expensive tax treatment, the CRA may also impose significant penalties.
As a result of all these financial implications, property flipping tax assessments range from hundreds of thousands to millions of dollars.
Legal test: am I engaged in property flipping?
The courts have used the following criteria to determine whether a taxpayer purchased their property with the intention of selling it for a profit [4]:
The nature of the property sold: the more fungible and widely demanded the property, the more likely the court would consider the taxpayer to have intended to resell the property for profit.
The length of time the property was owned: generally speaking, flipped property is only owned for a short period of time before it is sold.
The frequency or number of other similar transactions: if the individual frequently buys and sells property in a short period of time, they are likely engaged in property flipping. It is important to note, however, that isolated or infrequent sales can still be property flipping.
The amount of work or effort expended on the property: an individual may be involved in flipping if they put work into bringing the property into a more marketable condition and/or made special efforts to find or attract purchasers.
Financing arrangements: the courts are suspicious of any financial arrangement in which the borrower can pay off the mortgage quickly without a penalty since this might suggest that the borrower planned to sell the property and pay off the mortgage fast.
Other people on title: because taxpayers typically purchase their principal residence independently, the courts look questionably at other people being on title, thinking that they may be acting as an investor in an adventure in the nature of trade.
Change of listed address: the courts want evidence that the taxpayer changed their personal address listing to the property in question.
Personalization of home: anything a taxpayer changes to the home that makes it less marketable to average, future homebuyers is helpful to the taxpayer’s case. Examples are painting a mural on the wall in a child’s room or adding accessibility features.
Listing circumstances: if a real estate agent knocked on the taxpayer’s door with an offer to purchase the property, for example, this would help show that the sale was not necessarily the taxpayer’s initial intention.
The reason why the property was sold: sudden emergencies or other circumstances may provide an explanation that precludes a finding of property flipping.
Unpacking and housewarming: evidence that the taxpayer unpacked, settled in and used the house for events such as housewarming parties will assist the taxpayer in establishing that they intended to use the property as their personal residence.
Profit realized: the more profit the taxpayer realizes on the sale of the property, the more the courts will assume that the taxpayer knew they were going to earn that profit and that this was their intention.
Similarity of next property: if a taxpayer sells the property only to move to a similar property, the courts may assume that this is part of a pattern whereby the taxpayer intends to flip the property.
Distance of next property: similarly to the previous factor, is the taxpayer’s next home so close by that it’s makes it hard to understand why they bothered moving?
Occupation of homeowners: the courts are suspicious of taxpayers who work in real estate or construction and therefore seem to be using their professional skills to try and earn tax free income.
How we can help
At Blachford Tax Law we have extensive experience successfully representing individuals against property flipping and other real estate related reassessments. Please contact us if you or one of your clients is facing a tax dispute with the CRA.
Disclaimer
This article is for informational purposes only and does not constitute legal advice. If you wish to discuss your issue with a lawyer, contact us today at (613) 702-0322 or info@blachfordtaxlaw.com
[1] Canada Revenue Agency, “How does the Canada Revenue Agency address non-compliance in the real estate sector?” (Ottawa: CRA, 3 Nov 2017), online: <https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/compliance/does-canada-revenue-agency-address-non-compliance-real-estate-sector.html>.
[2] Canada Revenue Agency, “Reporting the sale of your principle residence for individuals (other than trusts)”, (Ottawa: CRA, 28 Feb 2017), online: <https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/federal-government-budgets/budget-2016-growing-middle-class/reporting-sale-your-principal-residence-individuals.html>.
[3] Canada Revenue Agency, “Residential Property Flipping Rule”, (Ottawa: CRA, 27 Mar 2023), online: < https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/federal-government-budgets/residential-property-flipping-rule.html>
[4] Happy Valley Farms Ltd v MNR (1986), 86 DTC 6421 (FCTD).