Does your occupancy period count towards your 12 month anti-flipping of property?

Bill C-32 makes a few simple changes to the Canadian Income Tax Act (the “Act”) that have drastic tax consequences for those who have “flipped property”.  For dispositions that occur after 2022, “flipped property” is taxed as business income.  The changes deem “flipped property” as inventory and not capital property (i.e. if sold would be considered a capital gain or loss), and that the activity undertaken when disposing is deemed as an adventure or concern in the nature of trade (i.e. a business activity).  One would think that CRA would grant therefore a business loss if the “flipped property” was sold for less than its cost, however, that’s not the case, and the change deems the loss from this business activity as zero.  That’s right, the tax consequences of the business activity involved in a “flipped property” is akin to punitive; taxed as business income on the upside but no write-off is granted against business income on the downside.

However, the definition of “flipped property” is quite narrow and qualified, and so this consequence only applies in the following circumstances:

1. The property is a housing unit (i.e. a real estate dwelling unit/property) in Canada
2. Was owned for less than 365 consecutive days unless the disposition is as a result of:
   • the owner’s or a relation’s death;
   • the owner and one or more relations become part of each other’s household (i.e. growing a family);
   • the breakdown, separation or divorce of a marriage or common-law relationship where they are living separate and apart for at least 90 days first;
   • the owner or a relation have a real personal safety concern or threat;
   • the owner or a relation suffers from a serious illness or disability;
   • the owner, spouse or common-law partner, need to relocate for work, business or post-secondary school that is further than 40 km away, including out of the country;
   • the owner, spouse or common-law partner, involuntarily lose their job;
   • the owner is bankrupt or insolvent; or
   • the destruction or expropriation of the property.

To understand how CRA interprets and the Act governs at what point one becomes an owner when its not clear, such as when legal titled or registered ownership is transferred but not beneficial ownership or vice versa, we can look to guidance from CRA’s policy statements and its legislative proposals for guidance.

In CRA’s guidance as to when ownership is transferred for real property under the Excise Tax Act, the meaning of “sale” was interpreted to mean when possession is granted under a purchase and sale agreement that included the eventual transfer beneficial and titled registered ownership once the transaction is able to be completed.  This is important especially when legal titled, registered or beneficial ownership cannot be transferred but the transferee/purchaser’s rights are akin to your traditional interpretation of ownership in nearly every other way.   This interpretation of “sale” normally requires that the contract be in writing (or meet the test to be verbally contractual), include a deposit or deposits, require of certain obligations such as the eventual transfer of legal ownership by way of a deed and that possession be taken and payments to maintain the real property begin (i.e. as applicable, pay the property taxes, condo fees, reimburse the transferor/seller for other carrying costs such as interest on the balance of the purchase price, etc.). Furthermore, possession doesn’t require occupancy, only that the transferee/purchaser has some kind of control, such as leasing to someone else.  Hence, if the meaning of a “sale” of “real property” (e.g. a housing unit) under the Excise Tax Act includes when occupancy is granted under the forgoing circumstances, then one could assume that the corollary would be that the transferee/purchaser’s ownership begins on the same day.

Outside of Quebec, CRA discussed the following considerations in regards to ownership when addressing the principal residence exemption:

• Two forms of property ownership are recognized – legal and beneficial. Normally legal ownership exists when title is transferred to, recorded in, registered in or otherwise carried in the name of a person. Legal owners are generally entitled to enforce their ownership rights against all other persons. The distinction between legal and beneficial ownership does not exist in civil law; ownership is a unitary concept.
• One person’s legal ownership of a property may be subject to another person’s beneficial ownership of that property. The term beneficial ownership is used to describe the type of ownership of a person who is entitled to the use and benefit of the property whether or not that person has concurrent legal ownership. A person who has beneficial ownership rights but not legal ownership can enforce those rights against the holder of the legal title. For example, beneficial ownership frequently arises when property is held in trust for a person in circumstances where, according to the terms of the trust, that person has authority to instruct the trustee to deal with the property as requested. 
• Beneficial ownership must be distinguished, however, from the other types of physical possession of property which a person may enjoy. For example, a tenant of a property, or a person who is allowed to occupy it only because the true owner has no objection, is not the beneficial owner of the property. In determining whether a person has beneficial ownership, one should consider such factors as the right to possession, the right to collect rents, the right to call for the mortgaging of the property, the right to transfer title by sale or by will, the obligation to repair, the obligation to pay property taxes and other relevant rights and obligations. Not all of these incidents of ownership need occur concurrently before it is concluded that the person has beneficial ownership of the property, which is a question of fact in each particular case.
• Since in most cases the same person has both legal and beneficial ownership, determining ownership on the basis of beneficial ownership alone is not often required.

However, among some other comments, CRA acknowledged that some situations exist where a taxpayer that is “ordinarily inhabiting” a property where actual legal titled registered or beneficial ownership has not yet been transferred but is to under contract, may be considered to own the property for purposes of the principal residence exemption such as:

• Ownership issues with condominium units: When acquiring a residential condominium unit, it is not unusual for a taxpayer to make a down payment, to enter into an agreement of purchase and sale, to enter into an occupancy agreement and to take possession prior to the registration of the condominium. The occupancy agreement may provide for payments which reflect the carrying costs of the condominium until the purchase transaction can be completed. Normally in such a situation, the taxpayer does not own the condominium unit until the condominium is registered under the relevant provincial legislation and the purchase transaction has closed.

The guidance with regards to real estate properties, is that CRA should include the occupancy period under a legitimate agreement of purchase and sale when counting the required 365 consecutive days of ownership to determine if the disposition is of a “flipped property”, and even more so the longer such occupancy period is and how evident it is that the taxpayer is not actually carrying out a business. This new law has yet to evolve, and certainly as the cases materialize, this article will be updated accordingly.

For any questions or help with your real estate and tax planning matters, please feel free to contact the lawyers at Levy Zavet PC.