The Canada Revenue Agency has taken a stance against real estate flipping with the introduction of Canada’s new anti-flipping tax which took effect January 1, 2023. This new tax seeks to curb profiteering within Canada’s housing market by taxing property sales for properties that sell within 12 months (365 days) from the date of the previous sale.
The new anti-flipping tax prohibits property owners from using the Principal Residence Exemption as a way to shelter the capital gain realized on a property that is “flipped”. For those who are unfamiliar with the Principal Residence Exemption, prior to this new tax being introduced, homeowners who sold their properties for a profit could be exempt from paying any tax on the gain (the difference between the original purchase price and sale price) so long as the property was declared as a principal residence. For clarity purposes, as of 1982, in Ontario, you are only allowed to declare one property as your principal residence. The new anti-flipping law prevents homeowners from utilizing this exemption if they sell within 12 months of buying their principal residence.
As an example, if you purchased a property for $600K and sold it for $650K six months later, prior to the new anti-flipping law, you would not be required to pay tax on the $50K gain if the property was declared as your principal residence.
In order to declare a property as your principal residence, either you, your spouse, common-law partner or child must live in the property for at some portion of the year. Properties that are purchased as an investment which generate income, such as a rental property, do not qualify as a principal residence. The income and profit generated from these investment properties are generally taxed as business income at your specific tax rate (the rate is different for each individual). The new anti-flipping law will restrict one’s ability to capitalize on quick returns resulting from market improvements and renovation investments due to the one year time restriction being enforced by the government.
Prior to the new anti-flipping law being implemented, many investors would purchase new construction properties to later sell or assign prior to or shortly after their completion in order to benefit financially from the gain realized between the time of signing and completion. Additionally, some investors would invest in traditional rehabilitation flips that consisted of purchasing a neglected home or condo, investing in improvements and then selling the home at a profit within a short period of time.
Despite the limitations this new tax introduces, some see potential benefits from Toronto’s new anti-flipping rules. By discouraging quick flips, it’s possible that more individuals and families will have more properties to choose from without having to compete with investors. This could increase the availability of housing for Toronto residents, which is a major benefit for those who are looking to buy in Toronto.
If you’re looking to buy or sell a home in Toronto, it’s important to understand the rules and regulations of Canada’s anti-flipping tax. Be sure to work with an experienced Toronto real estate agent who is familiar with the restrictions and can help you navigate the market. With their help, you’ll be better equipped to find the right property while also avoiding unexpected issues. It is also best to speak with an accountant prior to purchasing an investment property to ensure you can limit your tax liability as much as possible and avoid running into unexpected expenses.
It remains to be seen whether or not Toronto’s anti-flipping law will have a positive impact on the city’s housing market. As more buyers and sellers become aware of the new law’s provisions, it may start to have an effect on property values and availability. For now, potential buyers and sellers should be aware of this important change in order to make informed decisions about their real estate transactions.
By understanding the terms of Canada’s anti-flipping tax and working with and experienced real estate professional, buyers and sellers can make sure that their transactions comply with the legislation. With this knowledge, they can ensure that they get the best deals possible.
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