Land in Canada, particularly in British Columbia, is a valuable commodity. Federal and provincial regulators have sought to address rising residential home prices by implementing tax rules to disincentivize speculative purchases of residential property for the purpose of resale.
A statutory rule aimed at curbing the flipping of residential properties was implemented in 2023 and is found in subsections 12(12) to (14) of the Income Tax Act (Canada) (the “Tax Act”). The tax consequences of these provisions are sometimes referred to as the “federal home flipping tax.” However, this label is somewhat misleading, as these provisions do not introduce a new tax; they change the way certain gains are characterized for tax purposes. For residential property located in British Columbia, a conceptually similar but distinct tax known as the ‘BC Home Flipping Tax’ can also apply.[1]
Under these provisions, a “flipped property”—defined as (i) a housing unit in Canada, or (ii) a right to acquire such a unit, held for less than 365 consecutive days, is deemed to be inventory of the taxpayer subject to exceptions set out in subsection 12(13) of the Tax Act which typically have to do sales arising from significant or unforeseen life events of individuals (divorce, death, insolvency, expropriation etc.). As a result, any gain realized on the disposition of such property is included in the taxpayer’s business income, rather than being treated as a capital gain.
This recharacterization has significant tax consequences. Gains included in business income are fully taxable, as opposed to capital gains, which are normally only 50% taxable. In addition, the principal residence exemption (provided in paragraph 40(2)(b) of the Tax Act) is not available for gains arising from the disposition of flipped property. Furthermore, if the taxpayer incurs a loss on the disposition of flipped property, the loss is deemed to be nil and is therefore not deductible against other income.
Conceptually, these deeming rules formalize the long-standing approach of the Canada Revenue Agency, which has scrutinized whether housing units (or rights to acquire them) disposed of within a short period should be treated as inventory rather than capital property. While the flipped property rules apply specifically to residential properties, the distinction between inventory and capital property remains critical for most land transactions.
The distinction between inventory and capital property also has important implications for corporate reorganizations under subsections 85(1) and 97(2) of the Tax Act, which allow for tax-deferred rollovers into corporations and partnerships, respectively. However, a detailed discussion of these provisions is beyond the scope of this insight post.
A key takeaway from the flipped property rules is the importance of seeking tax advice when disposing of property (whether residential or otherwise). Proper characterization of the property as inventory or capital property can have a significant impact on the tax consequences of the disposition, including whether the gain is fully included in income or subject to the capital gains inclusion rate.
For questions about your specific situation, please contact Max Walker or Jisoo Vis.
[1] See our Insight Post on this provincial tax for more information.