Property Flipping Tax Rule in Canada: How the 365-Day Test Works

If you bought a home and sold it within a year, you may be wondering whether the profit is a lightly taxed capital gain, covered by the principal residence exemption, or something else. Since the flipping rule was introduced, a quick sale can be treated very differently.

This article walks through how the 365-day test works, the exceptions in the Income Tax Act, and how the CRA looks at sales that fall outside the rule. Every sale turns on its dates and reasons, so a lawyer or accountant should review yours.

What the flipping rule says

A gain on a housing unit in Canada, or a right to acquire one, held for less than 365 consecutive days before disposition is deemed to be business income, not a capital gain. Under subsection 12(12) of the Income Tax Act, you are deemed to carry on a business that is an adventure or concern in the nature of trade, the property is deemed to be inventory, and it is deemed not to be capital property.

The practical effect is on the tax rate. Only one-half of a capital gain is taxable, under paragraph 38(a). Business income does not get that one-half treatment, so the same profit can produce a noticeably higher tax bill.

The rule also covers a right to acquire a housing unit, so an assignment of a purchase agreement held under 365 days is caught. The CRA also notes that a business loss on a flipped property is deemed to be nil, so you cannot use a flip loss against other income.

Exceptions to the rule

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

• The death of you or a related person.
• A related person joining your household, or you joining theirs.
• A marriage or common-law breakdown, with at least 90 days living separate.
• A threat to your personal safety.
• A serious illness or disability.
• An eligible relocation.
• Involuntary termination of employment.
• Insolvency.
• Destruction or expropriation of the property.

Whether your sale reasonably fits one of these is a question of fact. Keep documents that show the event and its timing, and have a professional check the exact wording in the Act.

Sales outside the rule are not automatically capital gains

Passing the 365-day mark does not guarantee capital treatment. When the CRA audits a real estate sale, it looks at the type of property sold, how long it was owned, your history of selling similar properties, any work done on the property, why it was sold, and your intention in buying it. A property bought with the main intention of selling it is taxed on the resulting gain as business income.

The CRA also says the principal residence exemption usually means no tax on a home sale, except where the property was bought mainly to sell for profit. So both the length of ownership and your purpose matter.

Reporting the sale

Sales of a principal residence must be reported on Schedule 3, and Form T2091(IND) is completed and included with the return. Reporting the sale is required even if the home was the principal residence for every year owned.

If a real estate disposition was not reported, the CRA may reassess beyond the normal reassessment period, limited to amounts related to that disposition. A late-filed designation can also carry a penalty, which is the lesser of $8,000 and $100 for each complete month from the original due date to the date of the request.

What to do next

Start with the dates, because the whole test depends on them. Then build a record of why you sold.

• Find the dates you acquired the property or the right to acquire it, and the date of disposition.
• Count the consecutive days between them and check whether the total is under 365.
• Gather proof of any life event that led to the sale, such as medical records, a separation date or an employment termination letter.
• Collect renovation invoices, listing records and your purchase and sale documents.
• Ask an accountant how the sale should be reported and whether the exemption can be used.
• Speak to a lawyer if you have signed or are about to sign an agreement to sell soon after buying.

Frequently asked questions