House Flipping: What are the Tax Consequences?

Increasing interest rates have sparked a warning from the International Monetary Fund (IMF) that approaching headwinds could affect housing values; potentially good news for Canadians looking to enter the housing market. But there is also tax risk for investors intending to purchase and flip real estate, and a good opportunity for tax and financial advisors to provide valuable counsel.

What your clients need to know is in some circumstances, the profits from the sale of the house could be fully taxable, and the Principal Residence Exemption would not apply, even if the owner lived in the home at some time during the year. A one-time transaction can be considered to be an “adventure or concern in the nature of trade,” depending on factors like intention, frequency of like transactions and relationship to the flipper’s line or work, which eliminates eligibility for the exemption.

All income generated must be reported, even if it is exempt from tax, as per new rules for 2016 and 2017 tax filings. In some instances, GST/HST must also be applied. Fees and commissions may also need to be reported, too. There are additional factors to consider if your clients are not Canadian residents, but purchase property in Canada. Further implications are present for returning residents of Canada.

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Additional educational resources:

1. If you have clients that invest and pay taxes on both sides of the border, find out more from noted expert speakers at the Distinguished Advisor Conference in November, entitled “Investment Strategies for Dual Taxpayers”. Review the recently updated agenda!
2. Get your copy of Essential Tax Facts, and share it with your clients, for tax-efficient decisions at all life stages.

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