To Flip or not to Flip – The Tax Consequences of Selling a Home

• 
  Sean Flaherty
  Lawyer

“Flipping” is an investment strategy where an investor purchases real estate with the intention of quickly selling it at a profit. While flipping can be lucrative, it may also attract a higher income tax inclusion than other types of sale. Because real estate represents such a large investment, it is important to know what factors are considered by the CRA when classifying a sale for tax purposes.

In general, only half the net income from selling real estate is taxable[1], and profits on the sale of most primary residences are exempt from income tax entirely under the “primary residence exemption”[2]. The net profits from flipping, however, may be fully included in a seller’s taxable income if the profits are determined to be “business income”[3].

In addition to the full inclusion of net profits in the seller’s taxable income, if a sale is determined to be business income, the seller can’t claim the principle residence exemption. Further, if the CRA determines that the seller is in the business of selling houses, and that the seller built or substantially renovated a home in order to rent or sell it, then the entire sale price will be subject to GST[4].

There is no one rule for determining if a sale gives rise to business income, but it generally arises when a seller develops residential real estate to sell at a profit[5]. The CRA looks for a number of factors to determine if a sale generates business income, including[6]:

1. The seller doesn’t get personal enjoyment or income out of the property.
2. A short period of ownership before sale.
3. The seller frequently completes similar transactions.
4. The seller has worked to make the property more marketable, or made special efforts to find buyers.
5. A lack of proof that there wasn’t an intent to sell the property for profit.
6. The seller’s motive when they acquired the property.

The CRA may also consider the location of the property, the profession of the seller, the financing of the purchase, and evidence that the seller or their associates dealt extensively with real estate[7].

Of these factors, the most determinative is motive at the time of purchase, as stated in the recent case of Hansen v The Queen (“Hansen”)[8]. If an investor acquires a property with the primary intention of reselling it at a profit, or the secondary intention of selling at a profit under the right circumstances, then the sale will likely generate business income. If the motive is instead to hold onto the property and use it, it is evidence that the sale does not generate business income.

Hansen concerned a contractor who lived in, and sold, five houses in six years. The contractor successfully claimed the principal residence exemption on three of the sales, and was determined to have earned business income on the other two. The case illustrates the intensely factual nature of these determinations.

Real estate is a significant investment, and selling it can create a large tax bill for the unprepared. It is important to plan and know the risks before you act. Contact us at McKenzie Lake Lawyers for help and advice.

This blog was written by lawyer Sean Flaherty and Articling Student Keenan Fast.

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[1] Income Tax Act, (RSC, 1985, c 1 (5th Supp)) at s 38 (a) and s 3.

[2] Income Tax Act, (RSC, 1985, c 1 (5th Supp)) at s 40(2)(b).

[3] Income Tax Act, (RSC, 1985, c 1 (5th Supp)) at s 3.

[4] Excise Tax Act (RSC, 1985, c E-15) (ETA) at s.123(1). There is an exclusion for those who use the home primarily as a residence for themselves or their families in section 3 of Schedule V of Part IX of the ETA.

[5] Wall v The Queen, 2019 TCC 168 at 152.

[6] These come from Happy Valley Farms Ltd. v Minister of National Revenue, 1986 CarswellNat 375 at 13-20, but are not exhaustive. The CRA gives additional factors under IT218R

[7] See Cayer v Canada, 2007 TCC 136, CRA IT218R

[8] Hansen v The Queen, 2020 TCC 102 at paras 98-99.

This article was written by Lawyer Sean Flaherty and Articling Student Keenan Fast.