Although the facts of each case will determine the appropriate tax treatment, in general, the gains arising from flipping property are 100% taxable as business income.
While the CRA acknowledges that real estate flipping is not an illegal activity, they have expressed concern that this type of transaction is not properly reported by taxpayers. To that end, the CRA has “dedicated resources to ensure compliance with the tax rules for property sales and other real estate transactions”. In addition, they have indicated that they acquire and analyze third-party data to monitor real estate transactions. Specifically, the CRA uses a risk-based approach in detecting and addressing non-compliance and takes into account developing trends in the real estate market. As a result, it would not be surprising for taxpayers involved in certain real estate transactions to face increased scrutiny.
Rental properties
You may be wondering what the tax consequences are if a taxpayer rents out a property for a period of time before selling it. Let's consider a simple scenario where a taxpayer purchases a condo and rents it out for many years as a means of providing a steady stream of income. In this case, the condo will generally be considered a capital property and the rental income earned will be fully taxable. Keep in mind that the individual can deduct any reasonable expenses that were incurred to earn rental income, such as amounts for maintenance and repairs and mortgage interest. The two basic types of expenditures are current expenses and capital expenses. While we won't get into a detailed discussion on current versus capital expenses in this article, take note that generally, expenditures that provide an enduring benefit would be considered capital in nature. While the entire purchase cost of the rental property and related capital expenditures (such as improvements or large appliances) can't be deducted in a single year, capital cost allowance (or tax depreciation) can be claimed at predetermined rates on these depreciable capital expenditures to reduce income taxes. Note that the portion of a real estate purchase that represents the cost of the underlying and adjacent land is not depreciable (applicable to condos as well).
When capital cost allowance has been claimed against rental income and the taxpayer later sells the rental property, they may also have to pay tax on the portion of the gain that represents previously claimed depreciation. For instance, if proceeds from the sale of the property exceed the undepreciated capital cost of the rental property, the excess, up to the original cost, is taxed as recaptured depreciation in the year of sale. This recapture is taxed at a 100% inclusion rate. It is also important to take note that even though the property generated rental income, the gain in excess of recapture realized on the eventual disposition may or may not be on account of capital. In fact, the sale of a rental property will require consideration of the various factors noted above, including the taxpayer's intention at the time of purchase.