300-2005 Sheppard Avenue East, North York ON M2J 5B4
(+1) 416-443-1400

House Flipping: A Guide to Navigating Income Tax Rules

Investing in real estate offers numerous opportunities for profit, especially through house flipping. However, understanding the complex tax implications associated with this activity is crucial.

Understanding the Principal Residence Exemption (PRE)

A common misconception is that selling a “principal residence” is exempt from income tax. The reality is more nuanced, with specific conditions that need to be met:

  1. Eligibility: Only individuals and certain personal trusts can claim the PRE.
  2. Conditions for Qualifying: The property must be held as capital property, be ordinarily inhabited by the individual or a trust beneficiary, and the necessary forms must be filed with the tax return for the sale year.
  3. Limitations: Each family unit can designate only one property per year as their principal residence.
Capital Property vs. Inventory

Under the Income Tax Act (ITA), properties are classified as either inventory or capital property, influencing how gains or losses are taxed:

  • Capital Property: Qualifies for the PRE, allowing partial or full sheltering of capital gains.
  • Inventory Property: Generates business income or losses; ineligible for the PRE.

The owner’s intention at purchase is crucial in determining this classification. Factors like the duration of ownership, frequency of similar transactions, and circumstances of sale also play a role.

The “Ordinarily Inhabited” Requirement

For a property’s sale to qualify for the PRE, it must be “ordinarily inhabited” by the owner, their spouse, or child. This does not necessitate majority occupancy; even seasonal properties can qualify under certain circumstances.

Reporting Requirements and Penalties

Since 2016, the CRA mandates reporting the sale of a principal residence on Schedule 3 of the income tax return and Form T2091, even if fully sheltered by the PRE. Failure to comply can lead to penalties or PRE claim denial.

New Deeming Rules for Flipped Properties

Budget 2022 introduced new rules for “flipped properties”. Properties sold within 365 days of ownership are deemed inventory, generating business income and disqualifying them for the PRE. Exceptions exist based on the reason for the sale, like death or marital breakdown.

Preparing for a CRA Audit

Frequent property transactions or significant improvements before sale can trigger a CRA audit. It’s advisable to retain documents supporting the PRE claim. For uncertainties, consult a tax advisor.


Navigating the tax implications of house flipping requires a thorough understanding of the relevant sections of the Income Tax Act. Staying informed and prepared for potential audits is key to successfully engaging in this lucrative but complex area of real estate. For further guidance, consider consulting with a tax professional.