In January, a new by-law under residential real estate laws was implemented by the Canadian Federal Government to reduce the number of homes that are flipped in the country. Canadians who purchased residential property with the intentions of “flipping” the house may want to take note of the new law.
Flipping a property entails a purchase of a house, completing renovations or improvements, and increasing the purchase price to make a profit as a resale. In some cases, the property is “resold” before an official available sell date.
Before January 1, 2023, this business maneuver saw 50% of the capital gains of flipping property taxed whereas the new by-law demands 100% of the profits are taxable. This sees the residential capital gains categorized as business income if the property is sold within 365 days of the initial purchase date.
Understanding the Anti-Flipping Regulations
A residential real estate property is described as a temporary or permanent private dwellings and related land. Under the anti-flipping regulations, the sale of such property is calculated as a business income rather than with the usual capital gains inclusion rate, the Principal Residence Exemption, or any other absolution percentage.
Why Was This Law Introduced?
The anti-flipping regulation was introduced and passed by the federal government in an attempt to help make the housing market more affordable and available for all Canadians. In recent years, the Canadian housing market has seen prices skyrocket across the country to a point where many cannot afford housing costs.
The market has seen a rise in ownership belonging to national and foreign investors who purchase homes, not for use as a principal residence, but with the intention to flip for profit. This creates a surge in pricing while allowing the investor to receive a 50% capital gains tax exemption.
An anti-flipping law puts a stop to this practice by forcing all profits to be taxed at 100%. Along with the hopes to make housing more attainable for the majority of Canadians, the new rule benefits the Canadian Revenue Agency by the reduced need to prove a quick resale was done for business profit.
Key Provisions of the Anti-Flipping Rules
The anti-flipping regulation places restrictions on assignment sales. With the intricate measures of an assignment sale, the new anti-flipping rule allows for a 12-month holding period that resets with the property ownership transferred into the name of the assignor.
This new regulation focuses on those residential properties and rental properties that are sold within 365 days of purchase, including pre-construction and assignment sales. It should be noted that there are some exemptions to this rule that protects special circumstances that regular home buyers may face (more on this below).
The Impact on Real Estate Investors and Homebuyers
So, what does this mean for the average real estate investor and homebuyer?
The act of flipping a house for profit is already subject to taxes. This new rule places more taxes on sales that were originally purchased within 365 days. This will fall under business income if the property is resold within 12 months of purchase, forcing the owner to claim it as a second income, thereby driving the person’s tax bracket up.
The impact of the new law will dissuade owners or assigned owners from “living in” the new property for a limited time to gain tax exemption under a fake primary residence cover.
Compliance and Enforcement
With a new law comes new penalties and enforcement rules. Each residential real estate sale will be scrutinized should there be a resale of the property within 365 days or less. The case will be monitored and sent to the federal Tax Court and further investigated by the proper authorities and agencies.
Exceptions and Exemptions
There can be extenuating circumstances wherein the homeowner may find themselves reselling the home within the 12-month period. To protect Canadians who purchase homes with the intention of maintaining a primary residence, there are legal exceptions to the new rule.
- Death of the taxpayer
- A related person joining the household
- Breakdown of relationship of owners
- Home poses threat to personal safety
- Owner develops serious illness or disability
- Involuntary termination of employment of the taxpayer
- Insolvency
- Destruction or expropriation of the property
Get Legal Advice and Guidance from a Real Estate Lawyer
A reputable real estate lawyer can assist you with the purchase of a residential property by helping you understand the new anti-flipping regulations. The negotiations of buying and selling a property can be complex, particularly if there are hidden defects on the property or deceptions on one side.
In Canada, tax evasion, or tax fraud, carries a penalty of up to 14 years in federal penitentiary, hefty fines, and foreign-travel restrictions. Do get caught on the wrong side of a real estate deal—hire a real estate lawyer to cover your bases.
Contact Zinati Kay to Hire a Real Estate Lawyer in Toronto
When selling a house, rely on the team at Zinati Kay – Real Estate Lawyers to work as a “real estate investor” with your best interests in mind. For over 25 years, we have been helping people across the GTA buy, sell, transfer title, and mortgage homes according to the local, provincial, and federal laws.
Contact us to inquire about our services and to get a quote from a top-notch real estate lawyer in Toronto.