Principal residence exemption and property flipping.

In today’s video, I will explain how you can take advantage of the principal residence exemption when you sell your property and the new anti-flipping rule recently introduced by the CRA.

Principal Residence Exemption Explained

An individual does not have to pay capital gains tax on the sale of a principal residence, because of the principal residence exemption. The principal residence exemption is available to an individual, where he or his current or former spouse or common-law partner, or child ordinarily resides in the property at any time in the year. The determination of whether a property is a principal residence of an individual is made on a year-by-year basis.

For example, assume that George, a Canadian tax resident, purchased a condo in Manitoba in 2015 for $300,000. In 2024, George sold his condo for $500,000, resulting in a profit of $200,000. George lived in the condo for all of the years that he owned it, but for 2 years when he lived in Thailand and kept his condo vacant. What is the dollar value of the principal exemption that George can claim?

George can claim the principal exemption for $180,000. This is calculated by dividing the sum of the number of years that George lived in the condo (8) and a bonus year (1), which he gets for free, by the number of years that George owned the property (10). This comes to 90%. If you multiply 90% by the total gain of $200,000, you come to a result of $180,000, which is the amount of the principal residence exemption.

New Anti-Flipping Rule

The CRA introduced a new tax rule to prevent individuals from purchasing a property, selling it for a profit within a year, and claiming the principal residence exemption to avoid paying capital gains tax. The rule applies to flipped residential properties sold on or after January 1, 2023. When the new rule is applied, the profit made from a flipped property is taxed as business income.

For example, John purchased a condo in Toronto on January 1, 2023 for $300,000. He sold it for $500,000 on December 1, 2023. According to the new rule, the property is categorized as ‘flipped property’ and the entire business profit made of $200,000 will be included in John’s personal income, subject to income tax at John’s marginal tax rate.

There are certain exemptions to the anti-flipping rule. If you sell your property within a year of purchasing it, and one of these circumstances applies to you, then the anti-flipping rule will not apply to you:

1. You or a person related to you dies.
2. You welcome a new child by birth or adoption.
3. You separate from your spouse or common-law partner.
4. You are forced to sell because of a threat to you or your relative’s personal safety.
5. You or your relative becomes disabled or seriously ill.
6. You have to move because of a job or a business, and your new home is at least 40 km closer to your new work location.
7. You, your spouse, or common law partner is fired from their job.
8. You become insolvent, meaning your debts are more than your assets.

These 8 circumstances were put in place by the CRA so as not to harm taxpayers who are forced to sell their home within a year of purchasing it due to circumstances beyond their control.

Conclusion

In conclusion, remember to claim the principal residence exemption so that you can minimize or eliminate the capital gains tax that you would otherwise have to pay on the sale of your principal residence. In addition, be mindful of the new anti-flipping rule and do not sell your property within a year of purchasing it.

Please like this video and subscribe to my channel. See you next time.

ABOUT THE AUTHOR

ALLAN MADAN

CPA, CA

Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.

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