The Canada Revenue Agency (CRA) spells out some definitive rules when it comes to real estate investment which includes flipping properties—buying them with the intention of fixing them up and selling for a profit. The CRA defines gain as “the difference between what the property is sold for and its cost.” In some situations, this is considered business income; in other situations, it is considered to be a capital gain.
How you report hinges on many factors. All property sold—including your principal residence, in 2016 or thereafter—must be reported to the CRA. Other properties sold must be reported either as business or capital gains income. If the property has decreased in value, you could also report a business or capital loss.
How Flipping Figures Into the Equation
After you’ve improved the home you bought and sold it for a profit, the money you’ve made forms part of your income. According to CRA rules, even if you actually lived in the property while renovations were occurring, it doesn’t entitle you to claim the place as a principal residence. The bottom line is profit from flipping real estate is generally considered fully taxable as business income.
Capital Gains or Business Income?
How much you’ll owe the CRA for selling a property that isn’t your primary residence depends on whether the CRA considers profits to be business income or capital gains. Capital gains tax is charged at half the rate as ordinary income. For instance, if you make $75,000 profit on a property, you will pay tax on $37,500 at the marginal tax rate.
However, if the CRA considers what you make on real estate investments as business income, you’ll have to pay taxes on the entire amount—a very big difference. So, how does the CRA make this distinction? If it believes you bought the property solely with the intent of selling it for a profit, it will likely be classified as business income.
Some Things the CRA Will Look At:
- How many properties you’ve bought and sold
- The nature of the renovations
- Purchase and sale timeframe
The CRA will also take your profession into account when it determines if the profits of a sale should be calculated as business income. Builders, contractors or those with similar professions might be charged as businesses.
The situation can get complicated, so getting not only the advice of your real estate professional, but also of an accountant and a lawyer, might be wise.