What Makes Flipping Houses a Business Income?
Given home prices in Vancouver, flipping houses can be a lucrative income opportunity. Who wouldn’t want to get in on the market? Unfortunately for Vancouverites, flipped homes in Vancouver are a CRA audit focus. There are many misconceptions about how the sale of a home is treated by the tax man. Depending on your circumstances, the gains may either not be taxable, be taxable as capital gains (half taxable), or fully included in income as business income. The CRA is likely to take the position that you gains are fully taxable as income. As with anything tax, it is up to you, the taxpayer, to prove the tax man wrong.
So, what does the CRA look at in order to say that you are in the business of flipping houses?
One factor is whether the person who flipped the house had a primary or secondary intention to sell the house for profit at the time of purchase or changed the use of the property from capital to inventory at any point. One of the main determining factors is the sellers previous training or experience with flipping houses. Are you a realtor? Are you a contractor who builds or renovates houses? Have you been involved in real estate business? Have you sold a few homes in the past few years?
It’s not just people who have a history of house sales or those who are connected with real estate businesses that are at risk. Even a one-time sale can be a business. This is because the definition of business includes “an adventure of concern in the nature of trade”. This is where the intention of the purchaser comes into play. The considerations that relate to primary or secondary intention, or change in use, are very complex. There isn’t enough space to cover that in this article. This is because every person who buys property hopes that it will go up in value and considers that, if it does go up, they may sell for a profit. Not only can the entire gain be included in your income, but you may have to pay GST on the full value (not just the gain) of the property.
Know what you’re getting into. Nothing is worse than having what you thought was a good economic stroke turn into financial disaster.
Note: Articles are for general information only and do not constitute tax advice nor can they be relied upon.
Sam Faris is a Toronto-based Chartered Professional Accountant who practices as an independent consultant on high-level Canadian tax matters and handles disputes with CRA. He has recently published an article a business magazine: HERE.