Canada’s new anti-flipping rules for residential real estate are scheduled to come into force on Jan. 1, 2023, and are designed to “reduce speculative demand in the market place and help to cool excessive price growth.”
The new tax law will disallow the use of the principal residence exemption to shelter the capital gain realized on the sale of your home if you’ve owned it for less than 12 months, allowing for certain exceptions such as death, disability, separation and work relocation. Instead, the gain will be 100 per cent taxable as business income.
But the Canada Revenue Agency isn’t waiting around for this new legislation to come into force. It’s currently challenging perceived real estate “flips” through the court system, with mixed results, depending on the facts of the case.
The most recent example involved a Toronto homeowner who went to Tax Court to challenge the CRA’s denial of her principal residence claim.
The taxpayer was reassessed by the CRA for her 2011, 2015 and 2016 taxation years in connection with the sale of four properties she owned at various times during that period. But it was the 2011 sale of her Toronto property that was most contentious, because the CRA assessed the taxpayer beyond the normal three-year reassessment period and imposed a gross negligence penalty for that year.
In court, the taxpayer explained she experienced “tumultuous relations” with her now ex-husband from 2010 through 2014. She said this resulted in an off-again/on-again cohabitation, culminating in a final separation and divorce in 2015. The taxpayer testified that during 2010 and 2011, she was frequently at the house in question “as a refuge from the acrimonious and abusive relationship with her now ex-husband.” She argued this house was her principal residence, so it should have been exempt from capital gains tax when she sold it in 2011.
The CRA disagreed, maintaining the property was acquired and disposed of as “an adventure in the nature of trade” and so its sale should be classified as 100 per cent taxable business income. It argued the taxpayer never changed her primary address, employer T4 address or other mailing addresses to this property, so its position was that she “flipped” the property after completely reconstructing it, in a relatively short period of time, for a large profit.
The Tax Court was ultimately tasked with deciding four basic questions with respect to the 2011 disposition of the home.
Should the sale be properly classified as an adventure in the nature of trade and, therefore, taxable as business income or as capital property, thereby affording it capital gains treatment? If it was capital property, was it the taxpayer’s principal residence, thus allowing the gain to be tax free? Was there sufficient misrepresentation on the taxpayer’s 2011 tax return (that is, the non-reporting of the property’s sale) to even allow the CRA to reopen the 2011 tax year, which would have otherwise been statute-barred and beyond the normal three-year reassessment period? And, finally, was the taxpayer grossly negligent in filing her 2011 tax return and thus subject to a gross negligence penalty?