In the heyday of rising real estate values, house flipping has become one of the hottest trends of the decade. It is important to understand the profits and risks from flipping real estate, and more importantly the tax implications of doing so.
Many investors believe that selling Canadian real estate will automatically result a capital gain, which is only 50% taxable. This is not necessarily the case. CRA may assess your profit as business income, which is 100% taxable. Some main factors that CRA considers are listed below:
• Primary intention
If the primary intention is to flip the house for a quick sale, your gain is fully taxable. However, if you plan to hold the property and receive rental income over a period of time, the gain will be taxed as a capital gain.
• Frequency of selling real estate
The higher the frequency of similar transactions, the more likelihood that CRA will treat the profits as business income.
• Nature of taxpayer occupation
If the investor’s occupation is closely aligned to selling or buying property (i.e. real estate agent, builder), it is more likely that the profit from sale will be treated as business income.
• Money borrowed
A highly-leveraged purchase where the investor borrowed heavily to buy the property will likely be treated as business income.
