New “anti-flip” rule in the real estate market
The Government of Canada is stepping up its efforts to curb real estate speculation.
Ottawa is now cracking down on the precipitous resale of properties, also known as real estate flips.
A rule published in the official gazette on March 17, 2023 modifies the income tax law by making it very costly to dispose of a property less than 365 days after its acquisition. The federal government hopes to use this new legal weapon to curb investors looking for short-term profits and redirect them to other sectors than real estate.
For Ottawa, this measure would help the country deal with the housing crisis that is widespread in all major Canadian cities.
Gains from speculation taxed at 100%.
This “anti-flip” rule provides that any profit from a precipitous resale is taxed by the Canada Revenue Agency as business income and is therefore taxed at 100%.
In addition, a seller who disposes of a property in a hurry will no longer be able to claim the principal residence exemption or take advantage of the rule that only 50% of the capital gain is taxable on the sale of a secondary residence.
As a result, profits from the sale of a property less than 12 months after its purchase will be taxed at 100%.
In the case of a loss resulting from the precipitous resale of an asset, the anti-flip law provides that it is considered null and void.
Exceptions to the rule
The “anti-flip” rule does not apply to transactions registered with notaries before January 1, 2023. There are also some exceptions where it does not apply:
- Death of the taxpayer
- Failure of marriage or common-law relationship
- Integration of a related person in the household or integration of the taxpayer in another household.
- Serious illness or disability of the taxpayer or a related person that requires a change of residence
- Threat to personal safety
- Insolvency
- Eligible relocation (moving for employment, education or business more than 40 kilometers from home)
- Destruction or expropriation of the property
The acceptability of the exception will be evaluated by the tax authorities on the initial intention of the taxpayer at the time of the purchase. It will be considered whether or not the person had a real plan to live in the property on a permanent basis at the time of purchase.
