Flipping Houses with Assignment Clauses – Part 4 of 4

Flipping Houses with Assignment Clauses – Part 4 of 4

Principal Residence Exemption, Business Income and Capital Gains

Flipping Houses with Assignment Clauses – Part 4 of 4

If you want to flip houses with assignment clauses for a profit, take a careful look at the criteria the Canada Revenue Agency (CRA) will consider when taxing you. If possible, structure your purchase so that you’ll receive capital gains treatment, and perhaps even the principal residence exemption.

Here’s what the Canada revenue agency (CRA) will look at:

(1) The nature of the property sold;

 (2) The length of period of ownership;

(3) The frequency and number of similar transactions by the taxpayer or real estate investor;

(4) The work expended (renovation) to make the property more marketable or to attract purchasers;

(5) The circumstances responsible for the sale of the property; and 

(6) The taxpayer’s intention or motive when the property was acquired

​How does a property qualify for principal Residence in Canada?How does a property qualify for principal Residence in Canada

A property qualifies as your principal residence for any year if it meets all of the following four conditions:

  • It is a housing unit, a leasehold interest in a housing unit, or a share of the capital stock of a co-operative housing corporation you acquire only to get the right to inhabit a housing unit owned by that corporation.
  • You own the property alone or jointly with another person.
  • You, your current or former spouse or common-law partner, or any of your children lived in it at some time during the year.
  • You designate the property as your principal residence.

The land on which your home is located can be part of your principal residence. Usually, the amount of land that you can consider as part of your principal residence is limited to 1/2 hectare (5,000square meters), which converts to about 1.24 acres (54,000 square feet).

However, if you can show that you need more land to use and enjoy your home, you can consider more than this amount as part of your principal residence. For example, this may happen if the minimum lot size imposed by a municipality at the time you bought the property is larger than 1/2 hectare.

Principal Residence Exemption (PRE)Principal Residence Exemption (PRE)

When a principal residence is sold, the gain is not taxable if it has been the person's principal residence for the whole time it has been owned.  This is because the principal residence exemption eliminates the capital gain.  In this case, there is no need to report the sale on your tax return. 

To designate a property as the principal residence, it does not have to be the place where the taxpayer lives all the time.  The property will qualify as a principal residence if the taxpayer, taxpayer's spouse or common-law partner, or any of the taxpayer's children lived in it at some time during the year.  However, if it is rented out the situation may change.  See the information below re change in use.

When the sale of a property results in business incomeWhen the sale of a property results in business income

Where the gain from the sale of a taxpayer’s personal residence results in business income (as opposed to a capital gain), the gain cannot be exempt from income tax as a result of the principal residence exemption under paragraph 40(2)(b). An individual does not have to be involved in the housing construction industry to have business income from the sale of houses, and the sale of one house can result in business income.

For more information about taxpayers buying and selling their own houses for the purpose of earning income, see the current version of Income Tax Info Sheet TI-001, Sale of a Residence by an Owner BuilderInterpretation Bulletin IT–218R, Profits, capital gains and losses from the sale of real estate, including farmland and inherited land and conversion of real estate from capital property to inventory and vice versa, and Interpretation Bulletin IT–459, Adventure or concern in the nature of trade.

Capital gain taxesCapital Gain Taxes

Capital gain – you have a capital gain when you sell, or are considered to have sold, a capital property for more than the total of its adjusted cost base and the outlays and expenses incurred to sell the property.

Capital loss – you have a capital loss when you sell, or are considered to have sold, a capital property for less than the total of its adjusted cost base and the outlays and expenses incurred to sell the property.

Contrary to popular belief, capital gains are not taxed at your marginal tax rate. Only half (50%) of the capital gain on any given sale is taxed all at your marginal tax rate (which varies by province). On a capital gain of $50,000 for instance, only half of that, or $25,000, would be taxable. For a Canadian in a 35% tax bracket for example, a $25,000 taxable capital gain would result in $8,750 taxes owing. The remaining $41,250 is the investors’ to keep.

The CRA offers step-by-step instructions at:

http://www.cra-arc.gc.ca/E/pub/tg/t4037/t4037-e.html#P317_34283

Capital gains versus capital lossesCapital gains versus capital losses

There are several ways to legally reduce, and in some cases avoid, capital gains tax. Some of the more common exceptions are detailed here:

Capital gains can be offset with capital losses from other investments. In the case you have no taxable capital gains however, a capital loss cannot be claimed against regular income except for some small business corporations.

If you sell an asset for a capital gain but do not expect to receive the money right away, you may be able to claim a reserve or defer the capital gain until a later time.If you are a farmer or a newcomer to Canada, they are special capital gains rules for you. The specifics can be found at:

http://www.cra-arc.gc.ca/E/pub/tg/t4037/t4037-e.html#P71_2292

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