A July 19, 2024 Court of Quebec case considered whether the sale of a house in 2016 was on account of capital or income. The taxpayer had purchased the property during a temporary marital separation but later reconciled and sold the property within six months at a profit.

The property was sold before the federal property flipping rules took effect on January 1, 2023. Under the property flipping rules, sales within a year of acquisition are treated on account of income, unless an exception applies. Sales over a year or where an exception applies, may be on account of capital or income based on the factors discussed below.

Taxpayer loses

The Court provided multiple reasons for concluding that the taxpayer’s primary intent in selling the property was to make a profit, thereby classifying the gain as fully taxable income.

First, the Court emphasized that the property was purchased significantly below the municipal assessment from an estate, without legal warranty, and was promptly renovated and resold within six months at a substantial profit. This quick turnover, coupled with extensive renovations, indicated a real estate flip rather than a long-term personal residence. Moreover, the property was insured as vacant, and the taxpayer never changed her address to reflect her asserted intention to move into the property.

Second, the financial arrangements and the listing description (at acquisition) suggested a profit-oriented motive. The taxpayer took out a mortgage without any penalties for early repayment, which facilitated a short-term sale. The property listing itself described the house as a good opportunity for a “flip,” signaling an expectation of resale for profit. These factors contradicted her assertion that she purchased the property primarily as a residence.

Third, the Court considered the broader pattern of the taxpayer’s behaviour. It noted two subsequent real estate transactions in 2018 and 2019 where the taxpayer engaged in similar transactions (purchases, renovation and quick resales for significant profits). None of these properties were used as her residence. The frequency and similarity of these transactions demonstrated a pattern of business activity.

Additionally, the Court noted that the taxpayer’s claim of marital difficulties influencing her decision to buy the property was contradicted by her husband’s actions. Shortly after the couple supposedly reconciled and sold the property, her husband purchased another property under similar conditions, casting further doubt on the couple’s stated reasons for these transactions.

Overall, the Court found these combined factors – purchase conditions, financial strategy, renovation and resale practices and a pattern of similar transactions – indicative of a clear intent to profit, thus justifying the classification of business income.

ACTION: Disposing of real estate may be fully taxable as income or partially taxable as a capital gain. If it is a capital gain, the principal residence exemption may be available. Consider what evidence you have, or could obtain, to support your filing position.