Beware of the Tax Implications of Flipping Houses in Canada

Property flipping is a business and taxed as a business income in Canada. Canada Revenue Agency is cracking down to ensure compliance.

 Many factors decide whether you earned a capital gain from the sale of your house or it is a business.

1. What is the nature of the property?

2. How long you held the property?

3. How many real estate transactions you made?

4. How much effort did you put into renovating the property?

5. What were your original intentions when you purchased the property?

6. Under what circumstances you sold the property?

A great post by a professional income tax accountant in Canada discusses the different income tax and excise tax issues related to flipping houses in Canada.

In this comprehensive and easy to understand the post, Maroof Hussain Sabri, a CPA in Ontario discusses how case law provides the decisive factors to determine if the real estate transactions result in a business income or capital gain.

Capital gains are included 50% only in the personal income tax return in Canada, Whereas business income is included in full. Capital gains cannot be offset against the other losses except capital losses. Business income (losses) can be offset with other sources of income except for capital losses.

You can claim many deductions against your business income coming from flipping houses. Common deductions are property acquisition expenses, closing expenses, renovation or improvement expenses, home office expenses, advertising, motor vehicle expenses and other usual business deductions.

You cannot claim principal residence exemption on the house you bought intending to sell for profit.

If you want to lower income taxes on your property flipping business, a corporation can be a solution. Flipping properties is an active business income and properties are inventories. However, if you generate any rental income from these properties, that’s passive income. That’s why it is very important to consult a corporate income tax accountant in Canada.

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