The real estate headlines have been hitting Canadian homeowners with a vengeance in 2022.
Strong sales and limited supply continue to spur big price gains to start 2022
Calgary housing market sees record high sales for April
Vancouver home sales up 50% from the start of the year
And then more recently, these?
The froth is off: Canadian houses now selling at $200K discounts
Canadian home sales down 24% from last year, 6% since May
Given that for many homeowners, their home is a significant part of their retirement picture and overall financial health, these headlines can be downright nightmare-inducing.
And then on the flip side, there are the many who are struggling to enter the real estate market, and for whom home ownership seems like an unattainable reality. Especially when faced with sky-rocketing home rental prices that make it seemingly impossible to save up for a down payment.
Which is why the federal government announced anti-flipping measures in their latest budget, released this past spring. These measures will apply to any home or rental residential property held for less than 12 months, and subsequently sold on or after January 1, 2023. Any profits earned on these sales will be treated as business income.
What exactly is property flipping?
Property flipping is a popular practice for real estate investors. The process involves buying a property, usually at a low price, maybe making some improvements, and then selling it soon afterwards for a higher price. While flipping can occasionally result in a genuine bargain for the buyer, it often leads to spiralling prices and artificial shortages in the housing market.
For example, if a flipper buys a property and then sells it without making any improvements, they may end up damaging the market value of the property and negatively impacting the surrounding community as was recently reported in the B.C. Lower Mainland. As a result, the new rules are designed to protect consumers and ensure that properties are being flipped in a fair and transparent manner.
“The government has been trying to find ways to cool the housing market without raking it for quite some time,” Ryan Mackiewich, WealthCo Senior Planner, confirms. “These new rules are in direct response to an attack on the housing market. There were a lot of investors flipping properties, trying to make a profit on the quickly rising market. One property in Vancouver was sold three times in three years making a profit of almost $500,000 each time it was sold. The new rules will no longer allow this. Essentially, where a property is owned for 12 months or less, the new rules treat these properties as business income, not capital, meaning that homeowners selling at less than the year mark will pay full tax on the appreciation in value, as opposed to the 50% they would pay if the property was treated as capital.”
Not only are these changes are designed to better protect Canadians from financial losses, but they also aim to prevent criminals from using house-flipping as a way to launder money, something that has been widely reported as a growing, nation-wide concern.
How can a homeowner minimize the impact to their portfolio?
There are exemptions in the works which will apply in select instances. If an individual needs to sell their residence within 12 months due to specific life circumstances - including a death in the family, disability, divorce, the birth of a new child, or a job change – they may be able to forego taxation.
The best way to mitigate any major impacts is to engage with your accountant.
“Your accountant will understand these new rules and will be able to determine how they will apply to your portfolio,” Mackiewich suggests. “They will also be able to give direction on the best way to structure your transactions to minimize your tax liability. They’ll be in the know on any tax breaks or incentives. And they’ll have insights on what type of account would be best to hold your funds in. Your accountant will also be the best person to help you work with your mortgage broker and realtor to keep you in the safe zone.”
January 1st will be here before you know it
“Accountants do a really fantastic job of staying on top of these changing rules and ensuring that they are well-prepared to give the best direction to their clients,” Mackiewich shares. “Which is why the best course of action is to involve your accountant early on in any decision-making that could be impacted by this new pending legislation.”
A member of WealthCo’s Integrated Advisory community, Ryan Mackiewich, CPA, CA is a Senior Planner with WealthCo. With over 25 years as a CPA, CA providing tax and business advisory expertise, Ryan also holds the Family Enterprise Advisor (FEA) designation and applies it to working with business families to help them effectively transition business, wealth, and roles. When he’s not doing that, Ryan loves to camp, hike, and explore all the wonderful places the world has to offer.
The Integrated Advisory community consists of a network of progressive CPA firms, along with best-in-class professional advisors, service, and product specialists, who work together to deliver an elevated and holistic client experience. One that optimizes both their personal and professional lives with an integrated financial strategy designed to help clients reach their goals.