Starting on January 1, 2023, the new deeming rule applies to flipping property to ensure that profits are subject to full income inclusion. Under the new rule, profits from the sale of a flipped property are deemed to be Business Income.
What is property flipping?
Property flipping involves purchasing residential property and reselling the property in a short period of time (12-month holding period) to realize a profit. The profit from property flipping is fully taxable as business income and does not qualify for the 50-percent capital gains inclusion rate or the Principal Residence Exemption.
Exemption from new deeming rule.
1. The death of the taxpayer or a person related to the taxpayer.
2. A related person joining the taxpayer’s household or the taxpayer joining a related person’s household (e.g., birth of a child, adoption, care of an elderly parent).
3. The breakdown of a marriage or common-law partnership of the taxpayer, where the taxpayer has been living separate and apart from their spouse or common-law partner for at least 90 days prior to the disposition.
4. A threat to the personal safety of the taxpayer or a related person (e.g., the threat of domestic violence).
5. The taxpayer or a related person is suffering from a serious disability or illness.
6. An involuntary termination of the employment of the taxpayer or the taxpayer’s spouse or common-law partner.
7. An eligible relocation of the taxpayer or the taxpayer’s spouse or common-law partner (e.g., generally, a relocation that enables the taxpayer to carry on business, be employed or attend full-time post-secondary education).
8. The insolvency of the taxpayer (e.g., due to an accumulation of debts).
9. The destruction or expropriation of the property (e.g., where the property is destroyed due to a natural or man-made disaster).
Due to a life event listed above or holding period is longer than 12 months, it would remain a question or fact whether profits from the disposition are taxed as business income or a capital gain.
What if a loss is incurred as a result of the disposition of a flipped property?
Expenses can be deducted from flipping are purchase price (ACB), Land Transfer taxes, Lawyer fees, Property inspection costs, Title insurance, Mortgage incurred banking charge and lawyer fee, Renovation, Real estate agent fee, Advertising fee, Staging fee, Interest penalties for mortgage repayment, etc. After deducting these expenses, any business profit will be 100% taxed. However, any losses resulting from the sale of a flipping property is deemed to be nil.