Anti-Flipping Rules and the Principal Residence Exemption in Canada

You bought a home, then had to sell it quickly. You may have lived in it the whole time and expected the sale to be tax-free. Under the flipping rule, a quick sale can be taxed very differently.

This article explains how the rule works, what it does to the principal residence exemption, and which life events can provide an exception. Your own facts will decide the outcome, so it is worth confirming with a lawyer or accountant.

This article covers Canadian federal tax law, which applies in every province.

What the flipping rule says

A flipped property is a housing unit in Canada, or a right to acquire one, that you owned or held for less than 365 consecutive days before you disposed of it. The gain on a flipped property is deemed business income, and the property is deemed inventory and not capital property.

Because it is not capital property, the principal residence exemption does not apply. The rule applies to dispositions after 2022.

The 365-day test is about how long you held the property. A home you lived in can still be a flipped property if it was held less than 365 consecutive days. Outside the flipping rule, the exemption depends on the property being a housing unit that you, or a spouse, common-law partner, former spouse or partner, or child, ordinarily inhabited in the year.

How it differs from a normal home sale

The business loss rule means you cannot use a loss on a flipped property to offset other income. Property that was already inventory of the taxpayer is outside the flipped-property definition.

For an ordinary sale, the capital gain is the proceeds of disposition minus the adjusted cost base and the outlays and expenses of the sale, and half of the capital gain is taxable. Since the 2016 tax year, the sale of a principal residence must be reported on Schedule 3 of the T1 return, even if there is no gain or the whole gain is exempt.

Life events that can provide an exception

The flipping rule does not apply to a disposition that can reasonably be considered to occur due to, or in anticipation of, one of the following:

• The death of you or a related person.
• A related person joining your household.
• The breakdown of a marriage or common-law partnership, where you have been separated at least 90 days.
• A threat to personal safety.
• Serious disability or illness.
• An eligible relocation.
• Involuntary termination of employment.
• Insolvency.
• Destruction or expropriation of the property.

Whether your sale fits one of these depends on the facts, including the timing and the reason for selling. Keep records that show what happened and when.

If the exception does not apply

If no exception fits, the gain is reported as business income rather than as a capital gain with a principal residence designation. This is different from the situation where a home was simply not your principal residence for some years, which is handled by the exemption formula.

If you held the home for 365 days or more, the flipping rule does not apply, and the usual rules apply: the sale is reported on Schedule 3, and you designate the property if it qualifies.

In that ordinary case, individuals designate a property and calculate any gain on Form T2091(IND). How the flipping rule and the ordinary rules apply to your sale depends on your situation, so it is worth confirming with a lawyer or accountant.

What to do next

• Confirm your purchase date and the date you disposed of the property, and count the consecutive days.
• Write down why you sold and gather proof, such as medical, employment, court or separation documents.
• Check whether the property was already inventory for you.
• Collect your closing documents and selling costs.
• Talk to a lawyer or accountant before filing, since business income and capital gains are reported differently.

Frequently asked questions