New anti-flipping rules for residential real estate, including rental properties, that took effect in 2023 were designed to reduce speculative demand in the marketplace and help cool excessive price growth. However, the Canada Revenue Agency can still challenge real estate flips that occurred before 2023 if it believes a taxpayer speculated and flipped a property for quick profit. This was demonstrated in a recent case decided last week involving a Vancouver taxpayer whose 2018 tax return was reassessed for failing to report the gain on her sale of a condominium unit, relying on the principal residence exemption.
The Case Details
In February 2015, the taxpayer entered into a pre-construction contract for a condo in North Vancouver for $660,000. Construction was completed, and she took possession in October 2017. The property was listed for sale on December 6, 2017, but did not sell immediately. It was relisted with a different agent on February 21, 2018, and sold on March 22, 2018, for $1,161,000, closing on June 28, 2018. After deducting costs, the gain was approximately $457,000.
The taxpayer claimed the property as her principal residence and did not report the gain on her 2018 tax return. The CRA disagreed, reassessing her on the basis that she was engaged in a business or an adventure or concern in the nature of trade, and included the $457,000 as business income.
Principal Residence Exemption Rules
Under the Income Tax Act, the principal residence exemption can only shelter a gain from tax if the property sold is considered capital property. If the property is not capital property because it was sold in the course of a business, the exemption cannot apply. The question before the Tax Court was whether the taxpayer was carrying on a business regarding her purchase and sale of the property. If so, the profit would be treated as 100 per cent taxable business income.
Prior jurisprudence has developed tests to determine if an asset was bought on income or capital account, considering: the nature of the property sold, length of ownership, frequency of similar transactions, work expended on the property, circumstances responsible for the sale, and the taxpayer's motive.
Court Analysis
The judge reviewed each factor. The period of ownership from closing in October 2017 to sale in June 2018 was fairly short, pointing toward an adventure or concern in the nature of trade. The taxpayer argued that the short ownership was due to a change in personal circumstances, but the court found insufficient evidence. The court also noted that the taxpayer had experience in real estate and had previously flipped properties, indicating a pattern of speculative activity.
Ultimately, the court upheld the CRA's reassessment, confirming that the gain was business income and not eligible for the principal residence exemption. This case serves as a warning to homeowners who flip properties quickly, even before the 2023 anti-flipping rules, as the CRA can challenge such transactions based on the facts and circumstances.
