Principal Issues: Whether in a particular situation described, a housing unit can be excluded from the definition of “flipped property” (as defined in subsection 12(13) of the Act), by reason of the exception in subparagraph 12(13)(b)(i). Essentially, whether a housing unit, which was received by a child from their deceased parent's estate and held by the child for less than 365 days prior to its disposition, can be excluded from the application of the flipped property rules (i.e., subsections 12(12) and 12(14)) on the basis that the disposition can reasonably be considered to have occurred due to the death of the taxpayer's parent.
Position: Question of fact.
Reasons: Depending on the facts of the situation, where there is a discernable connection between the two events (i.e., the death of the parent and the disposal of the housing unit by the child beneficiary), such that it may be possible to conclude that the disposition of the housing unit by the taxpayer can reasonably be considered to have occurred due to the death of a related person, the disposition may be excluded from the application of the flipped property rules in subsections 12(12)-12(14).
XXXXXXXXXX 2023-099010 Christina Foggia, CPA CA
January 29, 2024
Dear XXXXXXXXXX:
Re: Flipped Property Rules – Beneficiary of an Estate
This is in reply to your correspondence of September 7, 2023, wherein you requested our views concerning the application of the “flipped property rules” contained in subsections 12(12) to 12(14) of the Income Tax Act (“Act”). More specifically, you asked whether the exception to the definition of “flipped property” contained in subparagraph 12(13)(b)(i) of the Act would apply in a particular situation involving the disposal of a residential property by a beneficiary of an estate.
In the situation that you described, an estate acquires a housing unit in the 2021 taxation year upon the death of a child’s parent. Due to estate administration matters, title of the housing unit is not transferred to the child, being the beneficiary of the estate (the “child beneficiary” or the “taxpayer”), until the 2023 taxation year. The taxpayer then disposes of the property within 365 days of acquiring title to it.
You acknowledge that the provisions of subsection 40(7) of the Act apply only for purposes of paragraph 40(2)(b) of the Act and the definition of “principal residence” in section 54, and will not apply for purposes of the “flipped property rules” to deem the beneficiary to have owned the property continuously since the estate last acquired it.
Our Comments
This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R12, Advance Income Tax Rulings and Technical Interpretations.
Subsection 12(12) of the Act is a deeming rule that results in a gain on the disposition of a housing unit that is “flipped property” being fully taxable as business income. If absent this deeming provision, and the principal residence exemption in paragraph 40(2)(b) of the Act, a taxpayer would have had a gain from the disposition of a flipped property, then throughout the period that the taxpayer owned the flipped property, the taxpayer is deemed to carry on a business that is an adventure or concern in the nature of trade with respect to the flipped property; and the flipped property is deemed to be inventory of the taxpayer’s business and not to be capital property of the taxpayer.
Subsection 12(13) of the Act defines the term “flipped property” for purposes of subsections 12(12) and 12(14) to generally mean a property, other than inventory, (footnote 1) that is, prior to its disposition by the taxpayer, a housing unit located in Canada or a right to acquire a housing unit located in Canada; and owned or, in the case of a right to acquire, held, by the taxpayer for less than 365 consecutive days prior to its disposition.
Paragraph (b) of the flipped property definition in subsection 12(13) of the Act provides a list of life event exceptions. In a situation where one or more of the exceptions applies, the property is not considered a “flipped property” and subsections 12(12) to 12(14) will not apply. As noted, subparagraph (b)(i) provides an exception where a disposition of a housing unit “…can reasonably be considered to occur due to, or in anticipation of,….the death of the taxpayer or a person related to the taxpayer.”
For purposes of the Act, paragraph 251(2)(a) includes individuals who are connected by blood relationship as related persons. Additionally, paragraph 251(6)(a) of the Act provides, among other things, that persons are connected by blood relationship if one is the child or other descendant of the other.
In the present situation, you indicate that the housing unit was not owned by the estate for any period of time beyond the time necessary to settle the estate and the child beneficiary disposed of the housing unit soon after receiving it. It is a question of fact in any case whether the exception to the definition of “flipped property” contained in subparagraph 12(13)(b)(i) of the Act will apply. However, if it can be shown that there is a sufficiently clear connection between the death of the deceased parent and the disposition of the housing unit by the child beneficiary, then it may be possible to conclude that the disposition of the housing unit by the child beneficiary can reasonably be considered to have occurred due to the deceased parent’s death, and the gain realized on the disposition would not be deemed to be business income by virtue of the application of subsection 12(12) of the Act.
We trust our comments will be of assistance.
Yours truly,
Pamela Burnley CPA, CA
Manager
Business and Capital Transactions
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 Other than a property, or a right to acquire property, that would be inventory of the taxpayer if the definition of inventory in subsection 248(1) were read without reference to subsection 12.