Evelyn Jacks: Will house flipping put your principal residence exemption at risk?

In a hot housing market, “flipping” can be a lucrative strategy — but only if you don’t run afoul of the Canada Revenue Agency (CRA).

The strategy most often used is buying a home, making it your principal residence, then selling it — because the gain on the sale of a principal residence is tax exempt. But, how often can you do that before it raises eyebrows at the CRA?

If the CRA decides you are in the business of buying and selling homes it can disallow your claim. Even worse, it can disallow the capital gains treatment that comes with a 50% income-inclusion rate and require you to report 100% of the gain as business income.

The more closely your business or occupation is related to commercial real estate transactions — for example, if you are a real estate broker or a builder — the more likely it is that any gains realized from such transactions will not qualify for the principal-residence exemption.

 So, how will this affect your yearend tax planning? We look to court decisions for guidance on tax-filing requirements. For example, the courts have examined:

• the taxpayer’s intention with respect to the real estate at the time of its purchase,
• the feasibility of the taxpayer’s intention,
• the geographical location and zoned use of the real estate acquired,
• the extent to which these intentions were carried out by the taxpayer,
• evidence that the taxpayer’s intention changed after purchase of the real estate,
• the nature of the business, profession, calling or trade of the taxpayer and associates,
• the extent to which borrowed money was used to finance the real estate acquisition and the terms of the financing,
• the length of time that the real estate was held by the taxpayer,
• the factors which motivated the sale of the real estate, and
• evidence that the taxpayer and/or associates had dealt extensively in real estate.

It’s Your Money, Your Life.  Speak to your tax advisor about how to document the nature and frequency of your real estate transactions, especially if you have bought and sold several homes over the past several years. Your personal net worth may have increased substantially but ultimately, your wealth could well be eroded if CRA disagrees with your tax-exempt status. 

Evelyn Jacks is president of Knowledge Bureau and has just completed her fiftieth book. She is a keynote speaker at the Distinguished Advisor Conference in Naples, Fla., Nov 11-14. Follow her on Twitter @evelynjacks.