Principal Issues: Whether a change in use triggers the flipped property rule.
Position: No.
Reasons: The deemed disposition per subsection 45(1) applies only for the purposes of subdivision c of Division B of Part I of the Act and does not apply to subsections 12(12) and 12(13).
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Q.4 Flipped property and change of use
When there is a change of use, section 45 provides for a deemed disposition and acquisition at fair market value ("FMV"). For example, consider a situation where a taxpayer owns a residence that he has used for personal purposes for many years. In June 2024, he decides to rent out his residence and does not make the election under subsection 45(2). In April 2025, he receives an attractive offer and decides to sell the residence. As we understand it, subsection 12(13), which defines a property subject to flipped property, refers to the term "owned".
“Definition of flipped property
(13) For the purposes of subsections (12) and (14), a flipped property of a taxpayer means a property (other than a property, or a right to acquire property, that would be inventory of the taxpayer if the definition inventory in subsection 248(1) were read without reference to subsection (12)) that is
(a) prior to its disposition by the taxpayer, either
(i) a housing unit located in Canada, or
(ii) a right to acquire a housing unit located in Canada; and
(b) owned or, in the case of a right to acquire, held, by the taxpayer for less than 365 consecutive days prior to its disposition, other than a disposition that can reasonably be considered to occur due to, or in anticipation of, one or more of the following events:…”
In addition, the Explanatory Notes of the Department of Finance refer to "owned by the taxpayer".
"Subsection 12(13) provides the definition “flipped property”, which is relevant to new subsections 12(12) and (14). Together, these subsections provide a deeming rule to ensure profits from flipping residential real estate are always subject to full taxation.
A flipped property of a taxpayer is a housing unit that:
- is located in Canada
- would not be inventory of the taxpayer if the definition “inventory” was read without reference to new subsection 12(12) (this prevents circularity and ensures that only a property that would otherwise be a capital property is subject to the rules in subsections (12) and (14)); and
- was owned by the taxpayer for less than 365 consecutive days prior to the disposition of the property." (footnote 1)
Thus, in our view, even if there is a disposition and a deemed acquisition, the change in use will not change the taxpayer's ownership of the property. In the situation presented, since the property was held for more than 365 days, the measure on flipped property does not seem to apply.
Question
Does the CRA agree with our analysis that a change of use does not trigger subsection 12(12) if the taxpayer has owned the housing unit for more than 365 days?
CRA Response
Subsection 12(12) provides a deeming rule that the gain resulting from the disposition of a flipped property, as defined in subsection 12(13), is fully taxable as income.
The definition of “disposition” in subsection 248(1) lists various transactions or events that may or may not give rise to a disposition for the purposes of the Income Tax Act. Furthermore, this definition makes no mention of changes in use.
In short, if a taxpayer ceases to use the taxpayer’s residence for personal purposes in order to use it to earn income, and does not make the election provided for in subsection 45(2), it is pursuant to subsection 45(1) that the taxpayer is deemed to have disposed of a property, namely the taxpayer’s residence in the present case, and to have acquired it again, immediately thereafter, at FMV. However, this deeming rule, provided for in subsection 45(1), is limited in scope since that subsection applies only for the purposes of subdivision c of Division B of Part I, entitled “Taxable Capital Gains”.
Consequently, the deeming rule provided for in subsection 45(1) cannot be considered for the purposes of the flipped property rules set out in subsections 12(12), 12(13) and 12(14) since they are found in subdivision b of Division B of Part I entitled “Income or loss from a Business or Property”.
Thus, in the example given, a taxpayer who ceases to use the taxpayer’s residence for personal purposes in order to use it to earn income and who does not make the election provided for in subsection 45(2) would not be deemed to dispose of the taxpayer’s property for the purposes of the flipped property rules provided for in subsections 12(12), 12(13) and 12(14). Those rules would therefore not apply.
Éric Paquin
October 10, 2024
2024-102783
FOOTNOTES
Due to the requirements of our systems, the footnotes contained in the original document are reproduced below:
1 CANADA, Department of Finance Technical Notes, Income Tax, November 2022.