Exceptions to the CRA Flipping Rules for the Sale of New Houses
The Canada Revenue Agency (CRA) has introduced flipping rules that apply to the sale of real estate. These rules aim to ensure that profits from the sale of properties are reported and taxed as business income rather than capital gains.
However, CRA recognizes that not all sales within a short period of purchase are intended to generate profit and has introduced specific Exceptions for situations where the sale is due to unavoidable circumstances.
Understanding the CRA Flipping Rules
Under the flipping rules, if you sell a property within 12 months of acquiring it, CRA will assume that the profit is business income. This distinction is important because business income is fully taxable, while only 50% of capital gains are taxable. The principal residence Exception is also not available on business income. The rules apply regardless of whether you intended to occupy the property or sell it.
To avoid being taxed under these rules, you must qualify for one of the Exceptions.
Exceptions to the CRA Flipping Rules
- Death If the sale of the property is necessitated by the death of the owner or a related individual, the flipping rules do not apply.
- Disability or Serious Illness If the sale is due to a disability or serious illness affecting the taxpayer or a related individual, you may qualify for an Exception.
- Divorce or Separation Sales resulting from the breakdown of a marriage or common-law partnership qualify for an Exception, provided the separation has lasted at least 90 days.
- Employment Relocation If you or a related person is required to move at least 40 kilometers closer to a new work location, the sale of the property is exempt from the flipping rules.
- Insolvency or Bankruptcy Financial hardship, such as insolvency or bankruptcy, can force the sale of a property.
- Natural Disaster or External Factors Unforeseen natural disasters or man-made events, such as flooding, fires, or other significant disruptions, may make it necessary to sell a property.
- Government Expropriation If a property is expropriated or repossessed by a government or other authorized body, the sale is exempt from the flipping rules.
Proving Eligibility for an Exception
To qualify for one of these Exceptions, taxpayers must provide adequate documentation to CRA. For instance:
- Medical documentation for illness or disability.
- Legal agreements or court orders in the case of divorce or separation.
- Employment letters for relocation.
- Financial statements or bankruptcy filings for insolvency.
- Official notices for expropriation or disaster relief.
Maintaining thorough records is critical in the event of a CRA audit or review.
What Happens if No Exception Applies?
If none of the Exceptions apply, CRA will treat the profit from the sale as business income. This means the entire profit is taxable at your marginal tax rate. Additionally, failing to report the sale accurately could result in penalties and interest.
Conclusion
The CRA flipping rules are designed to target property transactions made for profit within a short period of purchase. However, the agency’s recognition of legitimate reasons for short-term sales ensures fairness for taxpayers facing unexpected circumstances. By understanding these Exceptions and maintaining proper documentation, you can navigate the rules effectively and avoid unnecessary tax liabilities.
For more detailed advice or assistance in determining your eligibility for an Exception, consult a qualified tax lawyer. At SpenceDrake Tax Law, we specialize in resolving complex tax matters and can help you manage disputes with the CRA. Contact us today to learn more about how we can assist you.
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Disclaimer
Each article/blog post is only meant to provide general information. It is posted on a specific date. Laws and rules change. Please know that it may be out of date. It is not meant to provide legal advice, and it does not provide legal advice. It cannot be relied on. Every tax situation is unique, and that may mean situations differ from this article/bog. If you have legal questions, please consult a lawyer.