As the popularity of house-flipping grows through an ever-expanding range of reality television programs about people who buy properties time forgot, fix them up, and sell them for a profit, many Canadians are looking at how this could work for them.
Initially they do it as a side-line to their full time jobs, working on days off and weekends to renovate, repair and paint properties to hopefully turn a little profit. With success it turns into a profitable small to medium-size business.
What many people don’t realize until tax time rolls around, is that Canada Revenue Agency (CRA) insists that you must report all of the money you make on real estate transactions, including flips. This could also include fees or commissions generated on those transactions, goods and services taxes, unreported income and unreported capital games.
In other words, all the profits you make from flipping a house are generally considered to be fully taxable as business income, whether you are doing it formally or informally.
We have seen people try to get around that by insisting that they actually lived in the house for a period of time as they renovated it, so it was their principal residence. The CRA says that the principal residence exemption does not apply to property flipping.
Under the CRA description, property flipping is when individuals, including real estate agents, buy and resell homes in a short period of time for a profit.
It also includes buying and selling a property before its official sale or construction – a process called an “assignment sale” but sometimes also referred to as “shadow flipping.” It also cracks down on individuals who renovate and live in their recently purchased property with the intention of selling it after claiming a principal residence exemption.
These transactions may also be subject to GST/HST which you would be responsible for remitting to the CRA.
At Piligrim Accounting we are making our clients aware of this particular issue now, because Canada’s tax agency has already announced that they are taking actions now to address what they perceive to be “non-compliance” in the real estate sector.
They also issued a warning that they are taking steps to ensure that the principal residence tax exemption is claimed only by those who are eligible for it.
To be clear, property flipping isn’t against any law in Canada. The caveat from the CRA is that not declaring income made from the process and paying taxes on it is illegal.
In practical terms, in means that any Canadian who sells a property during the fiscal year is now required to report basic sale information on the Schedule 3 “Capital Gains (or Loss)” section of the income tax return form.
You need to state the date of purchase, address of the property, and other details about any house sold that was claimed as a principal residence. Sellers are no longer able to claim the principal residence tax exemption without first reporting the sale. (In earlier years, the CRA did not insist that you report principal residence sales to qualify for the exemption.)
According to the CRA, the move was made in order to crack down on serial property flippers who were claiming investment properties as principal residences just to gain a tax exemption on their sales. Gathering such information will also offer insight into how popular property flipping has become in Canada and what possible effects it is having on the real estate market in general.
The bottom line is that you can avoid issues with the CRA as long as you report your real estate sales made throughout the year and properly claim your principal residence. If you are not familiar with the tax changes about property flipping, it would be a good idea to consult a certified tax accountant to review your sales activity to ensure compliance.
They will also be able to save you money in other areas by ensuring that you identify and claim valuable write-offs associated with your property flipping business.
Certified professional bookkeeper and certified tax specialist Elena Ivanova is managing director of Piligrim Accounting Inc., a national accounting and tax preparation service based in Richmond Hill, Ont. You can reach her at elena@piligrim-accounting.com.
