Anti-Flippers Beware: CRA Fines are Exorbitant

Ruth Horst

Canadian homeowners may not yet have caught up with the new rules around anti-flipping when they buy and sell their principal residences.  CRA has not only tightened the reporting rules, but now can deny the tax exempt treatment if the personal residence is not held for 365 consecutive days.  Some exceptions do apply.  So let’s take a look at the rules that should be discussed with all home owners and potential home owners:

The Legislation: Since 2016, all property sold in Canada must be reported on a tax return. Prior to 2016 the sale of a principal residence was not reportable to CRA. Since 2016, whenever a Principal Residence is sold, Form T2091 Designation of a Property as a Principal Residence by an Individual (Other than a Personal Trust) needs to be completed on the T1 reporting the address, the year acquired and the proceeds of disposition.

There are no tax consequences, if it indeed was a principal residence for all years owned. Beginning January 1^st 2023, unless a residential property (or rights to purchase such property) is owned or held for 365 days or more, the income is required to be reported on form T2125 as business income not a capital gain. Obviously this presents a much worse after-tax scenario for the taxpayer.

But in addition for those who had an exempt gain, failure to report the exempt transaction comes with penalties and the potential loss of the exemption itself – that’s important.

How it Works: Many contractors and individuals have a business of flipping houses (purchasing a home, renovating, and reselling) which is an acceptable business practice according to CRA. Where the issue lies is when a property is purchased, renovated and resold within the 365 day window and the owner is reporting it as a capital gain or as a principal residence. Individuals would often move from home to home so that they could claim the principal residence exemption on each property that they sell, usually at a profit.

Beginning January 1^st, 2023 CRA determined that this type of activity can only happen within a business operation. To purchase, renovate and sell within 365 days would not allow the housing unit to be exempt from taxation due to the Principal Residence Deduction nor be taxable at a lower rate by considering the sale to be a Capital Gain and be reported on S3.

There are, of course, situations that will mitigate these rules. These include life events that are beyond anyone’s control such as death, serious illness, loss of employment, breakdown of relationships, etc.

The Penalties.  There are several of them.  For failure to report the disposition of  a principal residence disposition on the T1, Schedule 3, the penalty is the lesser of the following amounts:

1. $8,000; or
2. $100 for each complete month from the original due date to the date your request was made in a form satisfactory to the CRA.

Be sure to adjust prior filed returns back to 2016 if you were not previously aware of this rule.

For House-flipping that is not reported, CRA may apply the Gross Negligence Penalty which adds 50% to the tax payable due to the sale of the housing unit plus interest. An additional implication is the GST payable on the sale of the house, when it occurs within a business.

Bottom Line: When buying or selling property, including a principal residence, make sure you are aware of the rules and the tax implications therein.

Join Knowledge Bureau for the CE Mini Summits on Families and their Real Estate for more information. In this half day live virtual event, participants will learn how to confidently file simple tax returns with a focus on filing the tax forms required for transactions families record on their T1 returns, including the use of their principal residence.