Property flipping is a popular way to make money, especially in Canada. Flipping involves purchasing a property with the intention of selling it quickly for a profit. Sometimes, the buy requires repairs and doing up the property – helping add to the resale value. For new properties, flipping is holding on to the asset for a short time, and selling at higher prices.
At face value, it is an easy way to make money, but flipping has become a contentious issue in Canada, leading to the introduction of new anti-flipping laws.
The “Residential Property Flipping Rule“, included in Bill C-32 tabled on November 3, 2022 outlines changes to the rules managing profits from property flipping, to curb speculation in the housing market and to prevent individuals from using real estate as a short-term investment. The hope is that this will lead to more affordable housing for Canadians.
Under the proposed new rules, effective January 1, 2023, Canadians who sell a home or rental residential property owned for less than 12 months (365 consecutive days) are essentially flipping, and all profits from are taxable as business income.
Capital Gains and Personal Residence Exemption
Capital Gains are profits from the sale of an asset, such as stocks, real estate, or business assets, and these are taxed at a lower rate than regular income. In Canada, only 50% of capital gains are subject to tax, meaning that the other 50% is tax-free income.
Personal Residence Exemption (PRE) is a tax provision that allows homeowners to exclude from their taxable income the capital gains earned from the sale of their primary residence. This means that when selling a primary residence, the homeowner is not required to pay any taxes on the profit.
Under the new anti-flipping law, the PRE will not be available for flipped properties, and the entire gain will be taxable as 100% business income.
Effects on Rental Properties
Moreover, the new rules also affect rental properties. Currently, if a taxpayer purchases a property for rental purposes, the rental income is taxable. This rental income can be offset by deductions for expenditures, such as mortgage interest, maintenance, property taxes, utilities, insurance, and management fees.
Under current law, generally, if this non-principal residence is sold, any profits are taxed as capital gains, resulting in only 50% of the gain being taxable, while the other 50% is tax-free.
However, this is also changing under the new laws. If the rental property sells in less than 12 months, any profits will be treated as a business income and will be 100% taxed.
It is essential to note that this rule only applies to gains, and individuals cannot report a business loss on a property sales, simply because it may fall within the definition of a “flipped property”. The new rules clearly set out a bright line test for a gain being ineligible for the PRE and 100% of the gain included in income, without the taxpayer’s intention being relevant.
Furthermore, even if a taxpayer holds the property longer than 12 months to avoid the application of the “flipped property” definition, they could still be subject to the CRA’s audit and scrutiny under the existing rules, which disallow the capital gain and PRE if the intention was to flip the house.
Exemptions to the Anti-Flipping Rule
There are certain exemptions to this Anti-Flipping Rule being applied in certain situations such as death, a threat to personal safety, breakdown of a relationship, serious illness or disability, relocation for work or termination, insolvency/bankruptcy, and births of children
Pros and Cons of the New Anti-Flipping Law
The new anti-flipping tax law in Canada has generated mixed reactions from different quarters. Here are some of the pros and cons of the law from social, entrepreneurial, and political perspectives.
Social Pros:
- The new law aims to reduce speculative activities in the housing market, such as house flipping, which can lead to inflated prices and decreased affordability for potential home buyers.
- The government hopes to increase affordable housing for Canadians looking to purchase homes and condos by taxing those making quick profits from buying and reselling real estate.
- The government estimates that this measure could bring in up to $3 billion over the next 3 years towards funding initiatives like increasing access to rental markets or providing support for low-income households.
Social Cons:
- The new tax could discourage investors from investing in real estate, which could lead to a shortage of rental properties and decreased housing affordability.
- The tax could lead to a decrease in real estate transactions, leading to a decrease in real estate values and a negative impact on the overall economy.
Entrepreneurial Pros:
- The new law could create opportunities for investors to hold properties for longer, allowing them to develop and renovate properties over time.
- Investors who commit to long-term investments will be able to avoid the new anti-flipping law’s tax consequences and could be more likely to provide affordable rental units.
Entrepreneurial Cons:
- The new tax could discourage investors from investing in real estate, which could lead to a shortage of rental properties and decreased housing affordability.
- The tax could lead to a decrease in real estate transactions, leading to a decrease in market valuations in some markets.
Political Pros:
- The law is a proactive measure by the government to address concerns around housing affordability, which is a pressing issue for many Canadians.
- The law is a step forward in protecting Canadians from real estate speculation and ensuring that everyone has access to affordable housing.
- The government estimates that this measure could bring in up to $3 billion over the next 3 years towards funding initiatives like increasing access to rental markets or providing support for low-income households, which could is a positive move.
Political Cons:
- The new tax could be seen as a disincentive to invest in real estate, which could lead to a decrease in real estate transactions and negatively impact the overall economy.
- The tax may be viewed by some as an infringement on property rights, as property owners may not be able to sell their property for a profit within a year of purchase without facing significant tax consequences.
- The new law may also lead to concerns around the government’s role in the real estate market, with some individuals viewing the law as government overreach.
In conclusion, Canada’s recent anti-flipping law aims to prevent individuals from using real estate as a short-term investment and to curb speculation in the housing market. It is essential to understand the new rules and exceptions, especially if you own a rental property or are planning to buy and sell a property within a year. While this law may have significant implications for investors, it could be an essential step towards making housing more accessible and affordable for all Canadians.
The penalties for violating the new anti-flipping law can be severe, so it is advisable to consult with a tax professional to ensure compliance.
For any of the above situations, we at Taxvisors are here to help and guide you in every way possible, so that your tax reporting and filings are professionally managed and submitted on time.
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