New Anti-Flipping Rules in Force for 2023

Beware of increased CRA powers to disallow the use of the Principal Residence Exemption for properties purchased and sold in under 12 months

By Slonee Malhotra

Over the past year we have seen increasing efforts by the Provincial and Federal Governments to regulate home prices in an effort to respond to the unaffordability crisis. We have previously written about the increases in the Non-Resident Speculation Tax, the More Homes Built Faster Act, and the Prohibition on the Purchase of Residential Property by Non-Canadians Act. We now have more information about the changes to the tax rules regarding house flipping. See our previous article discussing the proposed changes here.

House flipping is a practice whereby a buyer purchases a property with the intent to resell quickly for a profit. Typically, when you sell a home, if it is your principal residence then for every year you own the home, the gain on the capital property is exempted from tax if you declare such property to be your principal residence.[1] However, if you are a home flipper, you have to pay tax on the sale of the property as such activity is viewed as business income.

As of January 1, 2023, there is an automatic assumption that if you purchase and sell a residential property in under 12 months, you are deemed to be a house flipper and the sale is subject to tax. As such, any attempt to use the Principal Residence Exemption will be disallowed except in certain exceptions such as relocation, separation, death or disability.

The financial impact for individuals caught under this provision is significant. The CRA has began challenging house flipping through Tax Court and these efforts commenced prior to the new ruling coming into effect. The CRA also appears to be imposing gross negligence penalties if appropriate.

In a recent decision, one homeowner was the unlucky target of the CRA when the CRA accused her of house flipping. In this case, a Toronto woman owned four properties between 2011 and 2015, residing in each property as her principal residence during the renovations. The CRA focussed on the disposition of the 2011 property and the Tax Court sought to answer four questions in reaching their determination:

1. Should the sale be taxable as business income, or as capital property?
2. If it was capital property, was it the taxpayer’s principal residence?
3. Did the taxpayer make sufficient misrepresentations on her 2011 tax return that would allow the CRA to reopen the tax year outside of the normal three-year assessment period?
4. Was the taxpayer grossly negligent in her 2011 tax return?

The Court found that the woman, a teacher, in an abusive on and off again relationship “hardly fits the factual mould of usual ‘flippers’ of real properties.” Although she did not purchase the property with the intention of flipping it, the home could not be considered her principle residence at the time in question. The woman did not change her principal residence on her tax return, her T4 or any household bills.

The CRA was within its right to reassess outside of the allowable three-year assessment period, since the Toronto woman did not provide “details and material to show reasonably that she may have been correct in deeming the property her principal residence.”

After considering the nature of the property, length of ownership, her limited frequency of real estate endeavors up to that point, motive and circumstances dicrating the property’s sale, the Court found that the woman should not be held grossly negligent.

A lack of knowledge will not save you from the financial penalties associated with property flipping. If you have questions about capital gains exemptions, contact one of our qualified real estate lawyers today!