New Canadian laws for 2023 Real Estate

more access to purchasing homes. The new law, which was originally introduced in last April’s budget, establishes a $10,000 fine for people who are neither Canadian citizens nor permanent residents and who buy residential property.

There are some exemptions to the ban, including foreign buyers purchasing recreational properties such as cottages and cabins, residential real estate outside of cities with a population of at least 100,000, international students on a path to permanent residency, refugee claimants, foreigners who are in Canada on a work permit, and the spouses and common-law partners of Canadian citizens.

But real estate experts say it will have a minimal impact on addressing Canada’s housing affordability amid larger factors, including high interest rates.

The government’s intent behind the new legislation which is commonly referred to as an “anti-flipping tax” is another measure to reduce speculative demand and help to cool the excessive price growth we’ve seen in the past few years.

What is a Principal Residence Exemption?

Today, when a home qualifies as a principal residence and you sell it for a profit, capital gains realized on its disposition can be realized tax-free by claiming the principal residence exemption (PRE).

For example, if Wilma and Fred bought their principal home for $500,000 and sold it a few years later for $600,000, their profits, under the PRE would be essentially tax-fee (not taxed as income or capital gains).

For a home to be eligible for the PRE, requirements must be satisfied, such as actually owning the home, and living in it for at least part of the year by the individual (or their spouse, common-law partner, or child.). If the main reason for owning a housing unit is to gain or produce income, for example a rental property, then you would not be eligible for the PRE.

Capital Gains Vs. Business Income on the sale of a property

If your property was purchased for the purposes of flipping, assignment, or buying to build and sell, your profits on the sale of the property are generally taxed as Business Income at your tax rate. If you purchased a property to generate rental income, your profits on the sale of the property would be taxed as capital gains.

Generally, capital gains are only included in income at 50%, so they are taxed lower than business income.

To continue our example, if Wilma and Fred bought a home to flip for $500,000, renovated it for $50,000 and sold it to Betty and Barney for $600,000, their profits of $50,000 would be taxed as full business income. Assuming Wilma and Fred’s tax rate is 25%, they would owe the government $12,500 in taxes.

Anti-flipping and the Canada Revenue Agency

The Canada Revenue Agency (CRA) has already been investigating and enforcing residential real estate that was being flipped or assigned and not properly reported as business income. Essentially, house flippers have been using the Primary Residence Exemption to avoid or reduce taxes.

The new tax law puts an end to using the PRE as an option and will flat-out disallow the use of the principal residence exemption to shelter the capital gain realized on the sale of your home if you’ve owned it for less than 12 months.

Essentially, under the new tax law, anyone who sells a property which they owned for less than 12 months (specifically, 365 consecutive days) will be considered to have “flipped” the house and any profits from the deal will be taxed as business income.

This means the gain, less any associated expenses will be fully taxable in the year of the sale, just as though the seller earned the money in other employment.

Exceptions include a certain number of life events including the death of the individual or a related party, an addition to a household, breakdown of a relationship, a threat to personal safety, serious illness or disability, work relocation or termination, insolvency or destruction or expropriation of the home. Since every situation can be specific, this article should not be relied upon as legal, financial, or tax advice. We strongly encourage you to speak with a qualified accountant to determine specific implications, if any, to your situation.

The Bottom Line

Effective January 2023, if you plan to flip a home while owning it for less than 365, expect to be on the hook for taxes on the full value of your profits as the Principal Residence Exemption will no longer apply. Make sure you speak to a professional accountant if this situation may apply to you.

Toronto Vacant Home Tax

As we reminded Members recently, as of January 1, 2023, residential properties in Toronto that are unoccupied for more than six months (cumulative) in a calendar year, may be subject to the new City of Toronto's Vacant Home Tax (VHT), unless they meet one of the exemptions. The VHT was created to improve the supply of housing in the city.

What You Need to Know

1. A declaration form will need to be completed by property owners by February 2, 2023.

2. A property is considered vacant if it is not the principal residence of the owner or any permitted occupants or was not occupied by tenants for at least six months during the previous calendar year or is otherwise deemed to be vacant under the bylaw.

3. The tax is 1 per cent of the current value assessment (CVA) of the home.

4. Exemptions include principal residence, death, repairs, units undergoing major renovation, owner is in care or hospital, court order, transfer of legal ownership and occupancy for full-time employment is in place.

First-time homebuyer’s tax credit (FTHTC)

The 2022 federal budget announced an enhancement to the FTHTC. A person who becomes a first-time homeowner in

2022 and subsequent years will be eligible for a FTHTC of up to $1,500.

The Quebec government has announced its intention to harmonize with the federal change. As a result, a first-time home buyer will be eligible up to $3,000 in tax credits.

First home savings account (FHSA)

Announced in the 2022 federal budget, the FHSA plan is scheduled to come into effect on April 1, 2023. This new account is designed to help first-time home buyers by allowing them to save up to $40,000 tax-free.

Like a Registered Retirement Savings Plan (RRSP), contributions to the FHSA will be deductible. Then, like a Tax-Free Savings Account (TFSA), withdrawals will not be taxed if they are made to purchase a qualifying property. Following the withdrawal, no refund will be required.

An individual can contribute up to $8,000 per year. This contribution room cannot be carried forward i.e., an individual who contributes less than $8,000 in one year will not be able to contribute more than this limit in subsequent years. If the taxpayer has not used the funds in their TFSA within 15 years of opening the account, the taxpayer will be able to transfer this amount to their tax-free RRSP.

It should be noted that a taxpayer will have to choose between using the Home Buyers’ Plan (HBP) funds or their FHSA’s funds. The individual will not be able to withdraw funds from both accounts for the purchase of the same qualifying property.