Flipping Properties and some Tax Implications (Ontario)
Oftentimes, people will investigate, consider or assist in the renovation of a property for subsequent sale at an increased price.
What does this mean? What are the tax implications? There are three choices here:
- Exempt, no tax,
- Investment property, capital gains,
The renovations are business activities, fully taxable.
If this happened to constitute the individual’s personal residence, then it may be exempt from capital gains tax.
If it's not a principal residence, there's no exemption from capital gains tax. The capital gain is basically the overall profit made on the deal. If it's a "one-off" investment, then one half of the capital gain is the taxable capital gain.
If this is the second or third time that you have done this, it's likely that the Canada Revenue Agency will view this as an "adventure in the nature of trade". That means it's a "business” even if you don’t call it a business, and the profit will be fully taxable in the year in which it's received not half.
Let’s consider a quick example. The market lift is $100,000.00 after all expenses. If it’s a principal residence, the homeowner keeps $100,000.00. If it’s a casual investment, then, the capital gain is $100,000.00, the taxable capital gain is $50,000.00 and the taxable payable is $25,000.00. The investor keeps $75,000.00. If we have it treated as a business, the builder-renovator reports the full gain, and adds $100,000.00 to his income in that taxation year. Based on current rates, the tax payable will be about $50,000.00 and the builder will keep $50,000.00.
So after tax:
- Homeowner, $100,000.00,
- Investor, $75,000.00,
Someone likely to start out with this "flip" in mind will often move into it and handle things gradually so that the principal residence exemption applies. Then, perhaps then next one will be a capital gain. Third time out, you should be ready to lose the capital gain treatment.
Any major renovation may require a Tarion Warranty, so that will have to be considered as well. You need to know these issues at the outset and plan around them.
Brian Madigan LL.B., Broker