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Before making a major financial decision you
should consult a qualified professional.
The gain on the sale of real estate is a
capital gain unless the property has been purchased with the intent
of reselling at a profit, or developed and sold as a business endeavour. If
it is considered a business transaction, the entire profit on the sale is taxable. If the transaction is a capital gain
(principal residence, summer cottage, second home, rental home, etc.), only 50% of the gain is
taxable. The principal residence exemption may eliminate part or all of a
capital gain.
It appears in 2024 that Canada Revenue Agency (CRA) is very actively
seeking and reassessing those taxpayers who have bought houses intending to
sell them at a profit, and have sold them without reporting the income as
business income. The length of time that the house was owned is not
necessarily relevant. See CRA
Widening The Net In The Hunt For House Flippers by Christine Aston of Wilson
Vukelich LLP.
Sale of Principal Residence -
Must Be Reported on Tax Return
The sale of real estate will be reported
on your tax return for the calendar year in which the legal title to the
property is transferred to the buyer - this is the completion date.
The possession date is the date on which the buyer is given the keys and can
move in, which is often 1 or 2 days after completion date, but could be on the
same date.
Frequency of Selling
Prior to 2022 legislation, there weren't any set rules about how often a
person can buy or build a house, move into and reside in it, then sell it,
without the transactions being considered business transactions. CRA would look at the frequency and the
intent (i.e., whether the houses were being purchased or built with the goal of reselling
and making a profit, or because the
person wanted a new house to live in or to rent out). They might even look at a
single event of purchasing or building and reselling a house and decide that it was a
business transaction, even if the house has been used as
a principal residence. Check out the current version of Interpretation
Bulletin, IT-218R
(Archived), re profits on the sale of real estate, especially the first
few paragraphs. See also the case of Hansen v. The Queen, with 5
houses bought and sold over 6 years - link at bottom.
This does NOT mean that selling a residential property that has been held
at least 12 months will automatically not be viewed as a case of property
flipping. The Income Tax Act, which already make property flipping
taxable as business income, will still apply to those sales.
If land is purchased without a housing unit
on it, that property cannot be considered the principal residence until the
year that a house is built and you move into it.
How Much Land for the Principal Residence Exemption
CRA usually considers that if there is more
than 1/2 hectare (1.25 acres) of property, only 1/2 hectare of the land can
be considered part of the principal residence, and there would be a capital
gain on the excess when the property is sold, even if the rest is the
principal residence. However, they also consider whether the
property is subdividable when purchased. Thus, if the property is 2 hectares, and is
not subdividable, they may consider the whole amount of the land to be part
of the principal residence.
There was a lot of information on this topic
in CRA's Interpretation Bulletin IT120, Principal Residence, including the
part about building on vacant land, the 1/2 hectare rule, etc. This bulletin is no longer available -
it was replaced by Income Tax Folio S1-F3-C2: Principal Residence,
which contains a link to form T2091(IND) for
the principal residence exemption.
Real Estate (Capital Property) Gifted or Sold Non-Arm's Length
If you plan to gift real estate or other capital property to a
non-arms-length person, or sell it to them at less than fair market value (FMV),
there may be tax implications. See Are Gifts or Inheritances
Taxable?
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