Did you know that an individual who sells his residence within twelve months of its acquisition will be presumed to have carried out a flip and will be taxed accordingly?
This Act puts an end to one of the very popular tax measures which is the exemption from capital gains on the sale of the principal residence within the meaning of the law.
Consequently, since January 1 , 2023, the gain realized on the resale of a residential property considered to be a principal residence within the meaning of the law, within 12 months following its purchase will be fully taxable as ordinary income instead of being taxed as a capital gain or being exempt from tax under the principal residence exemption.
It is worth remembering that the tax exemption on the sale of the main residence was already refused when there were several short-term resales.
We will explain to you, as you read this text, the implications of this new Law.
But to begin, here is the history of the latter:
Beginning in 2016, the federal government began requiring taxpayers claiming an exemption to report the details of the sale on annual tax returns.
Before January 1 , 2023, the sale of the main residence benefited from the general rule of tax exemption.
This Act is a continuation of the 2022 Fall Economic Statement and the 2022 Federal Budget. It received Royal Assent on December 15, 2022.
The goal of this new law is to slow down the meteoric rise in resale prices. When someone wants to flip, they generally put the property back on the market in less than a year with a substantial increase in price. This practice of flipping real estate can contribute to the housing crisis and the real estate bidding war. There can be an increase in the price of rents when the flip concerns income properties, thus making it impossible for the less fortunate to find housing.
In addition, flipping specialists often spend their saudi-arabia business email list pre-sale renovation budget on flashy items without worrying about the condition of the building itself and any defects that may exist at the time of resale, which has serious consequences for an inexperienced buyer.
The new law
This is a federal law that came into force on January 1, 2023 .
Revenu Québec has also harmonized this law to make it applicable to the Quebec tax authorities.
Consequently, an individual who sells a residence within twelve months of its acquisition is now subject to it and must pay tax. This is a change to the previous rule which provided for exemption from taxation upon the sale of the principal residence within the meaning of the law.
Thus, all the profit (gain) from the sale will be taxed as income, and will not be able to benefit from the 50% rate on capital gains, nor from the exemption for principal residence. This application is effective even if the real estate was not subject to capital gains.
There are, however, cases of exemption from the application of this Law, namely:
If the sale takes place following a death, separation, fear for personal safety, incapacity or illness, moving less than 40 kilometres closer to the new place of work, insolvency or involuntary disappearance, such as a fire, addition to the household, in particular the arrival of a new child.
Here is a concrete example: you buy a building for $300,000 and you resell the same building for $350,000 within the 12-month period. The gain realized is $50,000 (without taking into account the deductible amounts for illustration purposes) and it will be added to your annual income tax return, subject to the exemption cases stated above.
If the taxpayer can rely on an exemption as described above, the tax authorities may tax the profit from the sale of the house, and the seller may have the burden of proving that an exemption applies. Thus, exemptions could complicate the administration of the rule by the Canada Revenue Agency, as well as by the Quebec tax authorities.
Real estate flipping is not illegal per se, unless you fail to report it for tax purposes.