There are many shows on house flipping to make it look like the most fun and glamourous thing to do. However, while it is a great way to invest in real estate, many wonder about its legality. So, is house flipping legal in Canada?
Yes, house flipping is legal in Canada. It’s considered a real estate investment with several categories. There are rules for determining what qualifies as house flipping under the law. As an investment, there will be a tax on profits earned. Business income tax will apply, and GST/HST may apply.
Anyone flipping houses need to be familiar with the tax regulations. So, we discuss the legality of house flipping in Canada, tax regulations, and every other thing you should know.
The Legality of Flipping Houses in Canada
There are no laws outlawing house flipping in Canada. This makes it a legal and acceptable practice. As a result, several people adopt it as their mode of real estate investment. However, tax laws regulate income earned from house flipping. In some ways, this further lends credence to the legality of house flipping in the country.
What is House Flipping?
House flipping is the process of an individual buying a real estate property and reselling it for a profit after a short period. Anyone can be involved in house flipping from individual investors to professional contractors.
Categories of House Flipping
The Canadian Revenue Agency (CRA) categorizes those involved in house flipping into three.
- Professional Renovators and Contractors
This category buys real estate property and sells it as quickly as possible. In some cases, they renovate or demolish the property and rebuild before selling.
- Speculators or Middle Investors
CRA calls this shadow flipping. In this case, this category of people assigns the right to sell clause to another buyer after buying the property. They can do this with many buyers before finally selling the property, and in most cases, the original seller doesn’t know of the transactions.
- Individual Renovators
Regular people with no real estate experience fall in this category. They simply renovate the property, working with a contractor most times. Once the renovation is complete, they may sell it immediately or live in the property for a while to claim principal residence exemption before selling it.
Legal Test for House Flipping
Property flipping can come in various ways. In some cases, it involves renovating the property, while in some, it doesn’t. Common examples include:
- Buying a property, fixing it, and reselling for a profit
- Buying a property in a developing neighbourhood, waiting for the area to fully develop, the property appreciates and sells it.
- Buying a pre-construction property and reselling it once you complete it.
- Buying pre-built condos and selling them without even taking possession of them.
With all these ways that flipping can occur, it can be confusing to determine if you engaged in house flipping for tax purposes. In Happy Valley Farms Ltd v MNR, the court held that six factors would determine this.
- Nature of Property: When the property isn’t rented out for income and not lived in by the owner, it’s probably because the owner bought it with the intention of flipping.
- Length of Ownership: Where the owner only owned the property for a short period, it’s likely because the owner purchased it for flipping.
- Frequency of Similar Transactions: If the individual buys and sells other properties within a short period, house flipping is more likely. However, it’s possible that the flipping is irregular and rare.
- Effort Expended on the Property: Flipping can be assumed when a person fixes a property or works on it to make it more marketable.
- Reason for Selling: If it’s emergencies or unexpected circumstances that led to the sale, this could preclude the assumption of house flipping.
- The Intention at the Time of Purchase: What the individual planned to do with the property when they bought it’ll also affect the assumption of property flipping.
The CRA or Tax Court will look at these six factors to determine whether house flipping has happened and how to tax such persons.
Tax Laws on House Flipping Income
When house flipping started in Canada, most sellers avoided taxes by claiming that the property was their primary residence. This was possible because there is no tax on the income made after selling your principal place of residence in Canada. But the laws have now changed so that house flippers can be taxed.
CRA makes it compulsory for any Canadian that sold the property within a fiscal year to report basic sale information in their tax return. You have to file this under the Schedule 3 Capital Gains (or Losses) section.
Taxes on House Flipping
Here are the taxes on house flipping.
- Business Income Tax
100% of your profits when you flip a house will be taxed. Most people think only 50% of the profits will be taxed. This is due to the belief by many that CRA will treat it as Capital Gains. However, the tax liability is imposed on the whole profits instead.
Where the renovation on the property is substantial, you’ve to charge the buyer Harmonized Sales Tax/Goods and Services Tax and remit it to the CRA. This is usually when additions to the property make it relatively new.
How to Stay Compliant with Tax Laws?
Where you fail to comply with the necessary tax laws, you may have to pay penalties. Therefore, you should always ensure compliance.
- Report Your Sales Honestly
If you are flipping properties, you must comply with the tax laws to avoid the penalties. Proper reporting of your sales within the year can help you to do this. You should also properly claim your principal residence.
- Hire a Certified Accountant
While this may not be necessary, one can never be too careful about tax penalties. You can hire a Certified Accountant who’ll review your sales activities to ensure they’re legal and tax compliant. While the idea of using a real estate lawyer or bookkeeper might seem appealing, it isn’t the best choice.
A Certified Accountant is familiar with the tax laws more than anybody. They won’t only help you avoid tax penalties but will also know the write-offs you are entitled to and give you tax advice that’ll help your house flipping business.
Flipping houses is legal in Canada, providing an opportunity to invest in real estate. But there are tax regulations to be aware of when flipping houses. Knowing these regulations and staying compliant can save you a lot of trouble.