British Columbia recently announced that it intends to pass provincial legislation that imposes a home flipping tax (the "Tax") in an effort to increase and support the province's housing supply.
When a person purchases a residential property and sells it within two years of the date of purchase, that home is considered to be "flipped" and the Tax will apply. The income generated from that sale, subject to certain exceptions, will be taxed at a rate of up to 20%. The Tax will be applied at its highest rate on properties that are purchased and then held for the shortest period of time.
The Tax will operate separately from (and on top of) recent changes regarding the taxation of income generated from flipped homes at the federal level. The Tax is not yet in force. However, B.C. intends to introduce the Tax through new legislation during the upcoming provincial legislative session.
How will the Tax work?
The Tax will apply to homes sold on or after January 1, 2025. In particular, the proposed Tax will apply to the following types of sales:
- properties with a housing unit;
- properties zoned for residential use; and
- the right to acquire the above properties, such as the assignment of a purchase contract.
It remains to be seen how these terms will be defined and what properties will be captured by the new legislation if the Tax becomes law.
If any of the above are sold within one year (365 days) of purchase, then the sale is subject to the Tax and the income generated by the sale is taxed at a rate of 20%. That rate will then decline to zero between day 366 after purchase and day 730 after purchase (two years). The province has not yet announced how that decline in the rate of Tax during the second year after purchase will work in practice.
Consider the following examples:
Example A – Sale that attracts the Tax at a 20% rate
If you purchase a residential property on February 1, 2024 and sell that property on January 1, 2025. This sale falls within the first 365 days after purchasing the home and is fully taxable at a rate of 20%.
Example B – Sale that is fully exempt from the Tax
If you purchase a residential property on May 1, 2023 and sell that property on May 15, 2025. This sale falls outside of the first 730 days (two years) after purchase. Therefore, it is not a flipped property and the Tax does not apply.
Example C – Sale that attracts the Tax below the 20% rate
You purchase a residential property on February 1, 2024 and sell that property on April 1, 2025. This is a flipped property, but it falls within the second year after purchase. It will be subject to the Tax at a rate lower than 20%.
What are the exemptions to the Tax?
Not all homes sold within two years of purchase will be subject to the Tax. The province announced several types of exemptions. First, properties sold due to a change in life circumstances may be exempted. Those circumstances include:
- separation or divorce;
- death;
- disability or illness;
- relocation for work;
- involuntary job loss;
- change in household membership (for example, a birth or an adoption);
- personal safety; and
- insolvency.
As well, if someone sells their primary residence they may be able to exclude up to $20,000 when calculating the taxable income generated by the property's sale. There may also be exemptions available for situations where the seller has added to the overall housing supply or engaged in construction or real estate development activities.
The proposed Tax will also include special carve-outs for cases where properties, or parts of properties, that are used for non-residential purposes are sold within two years of being purchased.
Finally, it is important to note that the Tax will not apply to income earned from selling properties on reserve, treaty or self-governing Indigenous Nations' lands.
What are the combined effects of the Tax and Canada's federal Residential Property Flipping Rule?
The Tax proposed by the province would be imposed on top of Canada's Residential Property Flipping Rule (the "Rule"). The Rule identifies a "flipped" property as a residential property sold within 365 days of its purchase, with similar exemptions to those proposed by British Columbia. The Rule says that income generated from a flipped property:
- is deemed to be fully taxable business income; and
- does not qualify for the 50% capital gains exclusion rate or the Principle Residence Exemption.
In B.C., this means that income from selling a home after January 1, 2025 within the first year after its purchase will be fully taxable business income at the federal level and will also attract the Tax provincially.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
