Introduction
Any owner planning to sell their interest in a residential property located in British Columbia will face a new tax beginning on January 1, 2025. Under the Residential Property (Short-Term Holding) Profit Act (the “Act”), a new tax (the “Flipping Tax”) will apply to net income earned from the sale of residential properties, including any residential property acquired prior to January 1, 2025, if it is sold within 730 days (two years) of the date of acquisition[1].
In an effort to increase housing affordability and reduce housing price inflation, the BC government’s “Homes for People” action plan includes the implementation of the Flipping Tax, targeting speculators and discouraging short-term holding of property[2]. The Flipping Tax is separate from the existing property flipping rules under the Income Tax Act (Canada), which came into effect on January 1, 2023 and that are applicable to residential properties owned for less than one year.
Who and What Will Be Impacted By the Flipping Tax?
Any person, including an individual, corporation, partnership or trust, irrespective of their residency, who sells taxable property located in British Columbia within 730 days of acquisition is potentially subject to tax liability, unless an exemption applies[3]. Taxable property means “a beneficial interest in residential property” or “a right to acquire a beneficial interest in a residential property”[4]. Residential properties are properties with a housing unit or properties zoned, all or in part, for residential use, including any vacant land zoned for residential use. Pre-sale contracts and assignment of pre-sale contracts for a residential property will also be subject to the Flipping Tax. Property owners who are subject to the Flipping Tax must file a tax return within 90 days of the disposition of taxable property unless they qualify for an exemption[5].
When Does the Timer Start and End?
Generally, the 730 day timer begins on the date of acquisition[6]. For pre-sale contracts, the timer begins on the day that the pre-sale contract is signed. If a pre-sale contract has been assigned, the timer starts on the day of assignment, not the date on which the original buyer acquired the residential property.
The timer ends on the day the owner disposes of the property in exchange for consideration[7]. If consideration is payable in a lump sum, the date of disposal is the day that the consideration is due or received. If consideration is payable in instalments, the day of disposal is the day the first instalment is due or received.
How is the Tax Calculated?
The total tax payable varies depending on amount of time in which the property was held by the seller and any deductions that the seller may be entitled to. The total tax payable is calculated on the following basis:
Tax Payable = Tax Rate x Net Taxable Income[8]
Tax Rate
The tax rate depends on the duration for which the seller holds the property. If the seller sells the property within 365 days of acquisition, the tax rate is 20%. If the seller sells the property after 365 days, then the tax decreases on a sliding scale until no tax is payable, which is 730 days from the date of acquisition of the property. The tax rate for any property sold after 365 days is calculated as follows:
Tax Rate = 20% x [1 – (Days Held - 365)/365]
Net Taxable Income
The net taxable income is the proceeds from sale of the property, minus the costs to acquire the property, minus any costs to improve the property, unless a primary residence deduction applies[9].
Costs to purchase the property may include legal fees, any property transfer tax paid and the cost of title insurance[10]. Costs to improve the property may include replacing appliances and undertaking substantial renovations of a housing unit[11].
The primary residence deduction is a deduction of up to $20,000, applicable to any property which: (a) was held by a seller, that is an individual or that is a trust, for at least 365 consecutive days prior to the sale; and (b) includes a housing unit that was the primary residence of the individual or a beneficiary of the trust, as applicable, during the time it was held by individual or the trust[12]. In order for the property to qualify as a primary residence, the individual or the beneficiary of the trust must have resided in the property longer than any other place during the time the individual or the trust owned the property[13].
In summary, net taxable income may be calculated as follows:
Net Taxable Income = taxable income (proceeds from sale of property – cost to acquire property – cost to improve the property) – primary residence deduction (if applicable)
Exemptions
The Act provides for certain exemptions from the Flipping Tax, which may be separated into two categories: (a) exemptions which, if applicable, do not require the filing of a tax return; and (b) exemptions which may only be claimed if a tax return is filed.
Exemptions Available without Filing a Tax Return:
There are exemptions from the Flipping Tax that are available without filing a tax return[14], which may be categorized into the three categories listed below.
- Exempt Persons: Certain types of entities are exempt from the Flipping Tax. The exempt entities include registered charities, non-profit organizations, cooperative associations, the government, Indigenous nations and beneficiaries of a real estate investment trust[15].
- Exempt Locations: There is an exemption under the Act for residential properties located in specified locations, which includes residential properties located on a reserve or on treaty lands of a treaty first nation[16].
- Exemption for Exclusive Commercial Use: Properties that have been used exclusively for commercial purposes by the seller during the entire period of ownership are also exempt from the Flipping Tax, provided certain criteria are satisfied[17]. “Commercial purpose” is defined under the Act as not including any of the following[18]:
- 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; or
- a non-residential purpose carried out in a housing unit that is part of the residential property.
As described in further detail below, there are separate exemptions both for builders and developers, as well as the construction of a new housing unit, or the substantial renovation of an existing housing unit, on residential property that may be claimed by filing the required tax return.
Exemptions Available if a Tax Return is Filed:
There are several exemptions from the Flipping Tax that may only be claimed by filing the required tax return, which exemptions include the following:
- Life Circumstance: Sale of residential property for reasons unrelated to turning a profit. This includes circumstances such as: the death of a related individual; relocation to enable an individual to carry on a business or to be employed at a particular location or to be a student enrolled full-time in a post-secondary program; change in household membership; breakdown of marriage; and a delay in the completion date of more than 365 days for a housing unit under construction[19].
- Related Persons: Residential property sales between related persons. This includes related individuals connected by blood, marriage, common-law partnership and adoption and corporations that are controlled by the same person(s)[20].
- Builders and Developers: The sale of residential property by a person if: (a) the person or another person related to that person, in the ordinary course of business, buys and sells property for the purpose of constructing or placing buildings on the property, and holds the property for such purpose; and (b) the property being sold was held for such purpose[21].
- Construction of a housing unit or substantial renovations: Sale of property if: an existing housing unit on the property is substantially renovated; a new housing unit is constructed or placed on the property; or a housing unit is added to an existing housing unit on the property[22].
Enforcement
Failure to file a tax return required under the Act may result in a penalty, equal to the total of: (a) the greater of $500 and 5% of the unpaid tax payable in respect of the transaction; plus (b) the amount determined by the following formula[23]:
Amount = 1% x A x B
Where:
A = the greater of $500 and unpaid tax payable in respect of the transaction; and
B = the number of months, not exceeding 12 and rounded down to the nearest whole number, in the period beginning on the date the tax return was required to be filed and ending on the earlier of: (i) the date the tax return was filed; and (ii) the date the taxpayer is assessed a penalty under the applicable section of the Act.
The Act sets out additional penalties for repeated failures to file the tax return[24] or a failure to provide any required information on a tax return or any information or records required by the Canada Revenue Agency with respect to the applicable transaction[25].
Any person that intentionally evades, or attempts to evade, the payment of tax under the Act may be convicted of an offence and liable to either, or both, imprisonment of up two years and a fine between 50% and 200% of the amount of tax that was sought to be evaded[26].
Takeaway
Property owners seeking to sell their interest, or right to acquire an interest in a residential property in BC must carefully consider whether their transaction is subject to the Flipping Tax. Given the exemptions available, most sellers, including developers, builders and related corporate entities do not need to be overly concerned if they are selling for purposes other than short-term speculation. However, the effectiveness and administration of the Flipping Tax, and whether the Flipping Tax will capture the intended targets remains to be seen. The regulations to the Act have also not yet been released as of the date of this bulletin. We will provide an update once further information is available on the regulations to the Act.
Disclaimer: This bulletin is for general information purposes and is subject to the particular facts of each case; certain requirements may have been simplified and the law may have changed since the date of this bulletin.
