Flipping Houses? Here’s How The CRA Classifies Your Profits

House flipping has become a popular way to build wealth in Canada, especially as real estate prices have surged. The basic idea – buy a property, renovate it, and sell it quickly for profit –  sounds simple. But from the Canada Revenue Agency’s (CRA) point of view, flipping can carry complex tax consequences, and you could end up with a surprising bill if you misunderstand how the profits are taxed.

Whether you’re doing your first flip or already have a few under your belt, it’s crucial to understand how the CRA classifies flipping income, and what that means for your taxes.

What Is House Flipping?

House flipping refers to buying a property with the intention of reselling it, usually after renovations, for a quick profit. Unlike long-term real estate investors who often earn rental income and hold for appreciation, flippers focus on short-term gains. Given Canada’s hot housing markets, flipping has attracted everyone from hobby renovators to full-time investors.

How the CRA Views Flipping

Many people assume their house-flipping profits qualify as capital gains, which receive favourable tax treatment since only 50% of a capital gain is taxable. However, the CRA often classifies house flipping profits as business income, meaning 100% of the profit is fully taxable at your marginal tax rate.

The CRA examines several factors to make this decision, including:

• Intention at the time of purchase — Was the goal to live there or resell for profit?
• Frequency of transactions — Multiple flips per year suggests a business
• Extent of renovations — Major improvements to boost resale can indicate a business
• Length of ownership — Holding periods under a year (or even a few months) often raise red flags
• Financing arrangements — Short-term loans with interest-only payments can signal a flip

The CRA does not automatically treat every property sale the same way. They look at the facts and circumstances of each transaction to determine if you were acting as a business (100% taxable) or as an investor (capital gain, 50% taxable). In other words, your intent, supported by the facts, is critical. Even one transaction can be business income if the CRA decides your purpose was resale for profit.

For example, let’s say you buy a house for $500,000 and spend $100,000 on renovations. You sell it for $700,000, making a profit of $100,000.

If the CRA calls this business income, the full $100,000 is taxed at a 45% marginal rate, which would mean $45,000 in taxes. If it were a capital gain, only $50,000 would be taxable, resulting in about $22,500 in tax. That’s a $22,500 difference!

GST/HST Considerations

Many flippers don’t realize that selling a renovated property can trigger GST/HST obligations. If you substantially renovate a property, CRA may consider it a taxable supply of real property, meaning you have to charge and remit GST/HST on the sale price.

If you fail to register for and collect GST/HST when required, you could face interest and penalties. This is a common and costly oversight.

Recent Enforcement and Audits

The CRA has stepped up its audits of house flippers in recent years, especially in hot markets like Toronto and Vancouver. Several court cases have confirmed hefty reassessments and penalties for taxpayers who classified flips as capital gains when CRA deemed them business income. Because of this, it’s essential to maintain excellent records and be honest about your intent from the beginning.

Tax Strategies for Business Flippers

If you’re actively flipping multiple houses, you’re likely operating a business in the CRA’s eyes. Here’s how to structure and manage that business to reduce taxes and keep more of your profits.

1. Incorporate your flipping business
   1. Incorporating lets you take advantage of the lower small business tax rate (around 12% on the first $500,000 of active business income, vs. up to 53% personally)
   2. You can leave retained earnings in the corporation to reinvest in future projects
   3. Offers some liability protection
2. Deduct all eligible business expenses
   1. Materials, subcontractors, interest on loans, professional fees, tools, advertising, even a portion of a home office if you run the business from home
   2. Keep meticulous receipts and records
3. Use GST/HST correctly
   1. If you are substantially renovating homes for resale, you must charge and remit GST/HST on the sale
   2. Register with CRA and build that into your pricing
4. Plan for cash flow
   1. Budget for tax instalments if you have profitable flips
   2. Avoid surprise year-end tax bills
5. Consider wage or dividend splits
   1. If family members work legitimately in the flipping business, you may be able to pay them a reasonable salary from your corporation
   2. If appropriate, dividends can sometimes be paid to adult family members who own shares, subject to TOSI (tax on split income) rules

Tax Strategies for Investor Flippers

If you flip occasionally but see yourself mainly as a long-term investor, these strategies can help protect capital gains treatment and reduce audit risk.

1. Hold properties for longer
   1. Holding for 1–2 years or more, renting them out, or even moving in, supports the argument that your intention is investment, not flipping
   2. More likely to preserve capital gains treatment
2. Document your intention clearly
   1. Keep records of rental listings, lease agreements, personal use, or correspondence showing you planned to hold
   2. CRA audits focus on your initial intention, so be ready to prove it
3. Plan renovations carefully
   1. If you do renovations, consider modest improvements rather than major value-add flips, which could signal a business
   2. Major renovations with immediate resale may push you into business income
4. Time your sale strategically
   1. If you unexpectedly need to sell, wait as long as practical to strengthen your case that it wasn’t a pre-planned flip
   2. In other words, distance from purchase date can help
5. Use the principal residence exemption carefully
   1. If you genuinely move into a property and use it as your home, you may claim the principal residence exemption on sale
   2. However, repeatedly moving into properties and selling them can trigger CRA audits and denial of the exemption

Conclusion

House flipping can be lucrative, but tax treatment is complex and can catch you off guard if you’re not careful. Whether you’re renovating one property or turning flipping into a business, it’s critical to know how the CRA classifies your profits, and how to protect them.

Talk to Madan CPA before you start your next flip to ensure you stay compliant and maximize your after-tax returns.