House flipping or property flipping as they say in the trade, seems like an easy thing to do given up to now, was a red hot real estate market.
Property flipping is used to describe purchasing real estate for the purpose of selling it quickly at a profit. This is not just restricted to real estate, it also applies to stocks, etc.
This also includes buying and selling a property before its official sale or construction.
Generally when you sell your principal residence it is sold tax free. However the tax man has caught on to people who flip houses for a quick profit.
Canada Revenue agency now says if you sell the property within 1 year of purchasing it, the principle residence rule no longer applies.
That means you could be on the hook for thousands of dollars of tax as you are now house flipping.
6 Criterion to Consider When House Flipping
There was a court case that kicked this topic off Happy Valley Farms Ltd (1986). The court looked at 6 criteria
1) the nature of the property sold;
2) length of ownership
3) the number of transactions by the tax payer and how often
4) the work that was done to make the property more sell able
5) the conditions surrounding the sale
6) the taxpayers purpose for purchasing the property.
The taxman is also looking at the original intention for purchasing the property and that will determine if it is capital gains or business income.
If you never move into the property that is a tough sell to prove that it was your principal residence.
CRA went to court over a dispute with a taxpayer who claimed that she bought several properties and then sold them in a very short period of time.
The defendant claimed that the rental properties she bought, suddenly realized that the rents were too low and sold them.
The outcome of the case which is now considered a precedent, was that the property owner sold the properties at the earliest possible convenience, rather than hold on to them as an investment.
In other words, the defendant was now liable for thousands of dollars of tax instead of the 50% taxable gain.
Capital gain vs income
A capital gain has preferential tax treatment as compared to income. The difference is capital gains are taxed at 50% of the gain, whereas business income is taxed at 100% of the income.
So the potential profits are taxed at 100%.
Before buying any real estate for the intention of flipping, get some tax advice on how best to go about it. A gram of protection is worth a kilogram of cure.
Mathew Jazenko is VP of sales with MRJ Financial Solutions and can be contacted at 289-500-1978 or mailto:firstname.lastname@example.org