Real Estate Investor – Quick Sale ("Flip"): Capital Gain or Business Income?

I recently heard a comment from someone who indicated that since he had held his property, which he had renovated and lived in for more than a year, the gain would not be taxable. This misunderstanding of the Income Tax Act could cause quite a surprise and cost him unnecessary interest when the tax authorities reassess his tax returns.

In fact, I believe he is referring to the fact that starting January 1, 2023, the Income Tax Act (and the Taxation Act in Quebec) was amended to include a provision stating that the gain related to the sale of a home occurring before the end of the 365th day of ownership would be recharacterized as business income rather than a capital gain (There are exceptions). Therefore, since the capital gain is recharacterized as business income, the capital gain exemption on the sale of a principal residence could not be used. Imagine that in 2 years, the tax authorities inform you that you owe them $40,000 in taxes related to this transaction and that the money has been spent. Surprise!

The rule states that if there is a sale within 365 days of ownership, the gain is considered income and, therefore, taxed like salary or interest income. It does not indicate that if the sale occurs after 365 days of ownership, it will not be business income. The legislator only included a straightforward test that states that below 365 days, it is business income. Above 365 days, it depends.

What does it depend on? The initial intention is the intention at the time of acquisition. If the initial intention were to buy the property, renovate it, and sell it for profit, then that profit would be considered business income even if the house was occupied by the owner for two years if the facts support the intention. For example, if it is the second house renovated and sold in three years, the tax authorities might think they are dealing with a business.

Look at the box at the bottom of a page on the Revenu Québec website that I copied here:

Reference: Flipping Your Property (Home or Residential Complex) | Revenu Québec

If you have additional questions or want to consult a tax specialist, please call me.

Dany Turgeon, M. Tax, CD

This text is for educational purposes only and should not be used for tax planning or compliance purposes or for any particular situation. Please consult a tax specialist.