On April 25th, the Province enacted a flipping tax on residential property (the "Flipping Tax"), as previously mentioned in the 2024 Budget (summarized in our blog post here). The Flipping Tax, will to apply to dispositions of residential properties (including mixed use properties) in B.C. beginning on January 1, 2025.
The Province states that the purpose of the Flipping Tax is to encourage more affordable housing supply.
Mechanics of the Flipping Tax
The Flipping Tax is imposed on net income earned from the sale of residential property in B.C.
A "residential property" includes any housing unit and land that is zoned all or in part for residential uses (including vacant land). Residential property includes mixed use properties, but the Flipping Tax will operate to essentially back-out any portion of net taxable income attributable to the commercial portion of mixed use properties. The Flipping Tax will also apply to rights to acquire residential property i.e. it will apply to income from assignments of pre-sale condo contracts.
Net income is generally computed as proceeds received minus the cost paid by the taxpayer for its interests in the property plus costs to improve the property (e.g., renovation costs). Certain taxes, such as GST and B.C. property transfer tax payable on acquisition of the property can also be claimed. One can also deduct certain costs associated with the sale of the taxable property from the proceeds, ultimately reducing the net income. Examples of this include legal costs, home inspection costs and surveying expenses.
Net income is deemed to be zero if the number would be negative. The practical implication is one cannot use Flipping Tax losses on one property to offset net taxable income on another property. The Flipping Tax also introduces certain caps on the ability to reduce net taxable income by, for example, excluding unreasonable costs, double counted amounts and ignoring costs or expenses that are reimbursable (e.g., under a government subsidy program).
The Flipping Tax also contains a general anti-avoidance mechanism, similar to the one in the Income Tax Act (Canada) and other provincial tax legislation.
Quantum of Tax
The percentage of tax is dependent on the duration the property has been held, with no tax applying after a holding period of 730 days. The below chart depicts the applicable percentage payable on net income:
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The holding period of a taxable property begins the earlier of the day in which the taxpayer acquires to the property or a contractual right to acquire a property if that property is under development at the time and the person exercises the right to purchase. The holding period will also generally include a period of time in which the property is held by a related party (i.e., family members and control relationships with respect to corporations). The holding period generally ends on the date the property is disposed of, with the date of disposition being the day when all or a part of the proceeds for the property become payable.
Where portions of a taxable property are acquired at different times, the above tax rate is applied on the basis of the time of acquisition of each portion of the property.
Specified Deductions and Exemptions
The Flipping Tax is either reduced or does not apply to numerous persons and in various circumstances. These are summarized below.
Exempt Persons and Locations
First Nations organizations, municipalities and government bodies (including corporations owned by such persons), registered charities, associations formed under the Cooperative Association Act (Canada) and non-profit organizations are among those that will be exempt from the Flipping Tax. Beneficiaries of a real estate investment trust are exempt from the Flipping Tax in respect of transactions undertaken by the trust. The Flipping Tax generally does not apply to properties located on First Nations lands.
Importantly, there is a general exemption from the Flipping Tax for builders and developers. In order to qualify for this exemption, a person (or a non-individual affiliated entity of that person) needs to regularly and ordinarily undertake the buying and selling of property and the construction of buildings thereon.
Primary Residence Deduction
Where an individual owns a taxable property for at least a year and lives in one of the units on that property, they can generally reduce the net taxable income of a taxable property by $20,000.
New Builds, Renovations and Additions
The Flipping Tax does not apply to residential properties that are newly constructed and sold. Likewise, there are similar exemptions for when: (i) new housing units are added to a property, (ii) there is a substantial renovation of a housing unit, or (iii) there is a substantial renovation of an existing housing unit. A "substantial renovation" for purposes of the Flipping Tax is an increase in 100% of the habitable area of a housing unit or a circumstance where all or substantially all of the unit is removed or replaced except structural components.
Commercial Use
Where a person has held taxable property and the sole use of the property throughout the holding period of the person has been exclusively for a commercial purpose, no Flipping Tax is payable. The legislation does not provide an explicit definition of "commercial purpose", and instead lists the following activities as not commercial purposes:
- holding the residential property for sale
- renovating the residential property for sale
- providing accommodation, under a tenancy agreement or a short-term vacation rental arrangement, in a housing unit that is part of the residential property
- a non-residential purpose carried out in a housing unit that is part of the residential property
We expect that the intended use and limits of the commercial purpose exemption will be clarified by the Province over time.
Life and Other Circumstances
There are certain exemptions from the Flipping Tax for "life circumstances" e.g. separation or divorce, death, disability or illness, insolvency, etc. Note that these exemptions generally match the exemptions under the Federal Residential Property Flipping Rules.
Filing Obligations
Subject to certain exemptions, a separate tax return for each disposition of taxable property must be filed within 90 days of the sale.
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.