Flipping Houses: When Is It Taxed as Business Income? – A Complete Guide by a Montreal CPA Firm Near You

Introduction

Real estate flipping has become extremely common across Canada, especially in major cities like Montreal, Toronto, Vancouver, and Calgary. But CRA has intensified its scrutiny of property sales and now aggressively challenges taxpayers who claim capital gains or the principal residence exemption (PRE) when CRA believes the property was flipped for profit. When a property sale is considered a business activity, the profit becomes fully taxable as business income—not a 50% taxable capital gain. In many cases, CRA will also deny the PRE entirely, reassess GST/HST obligations, and apply gross negligence penalties. Understanding when a flip is considered business income is crucial for every investor, renovator, and homeowner.

Legal and Regulatory Framework

The taxation of house flipping is governed by the Income Tax Act, the Excise Tax Act (for GST/HST), and CRA’s real estate audit policies. Gains from selling real estate may be treated in three ways: capital gains (50% taxable), business income (100% taxable), or fully exempt under the PRE. CRA evaluates the taxpayer’s primary intention at purchase, subsequent actions, pattern of behaviour, and level of involvement. The new Residential Property Flipping Rule (effective January 1, 2023) deems any property sold after being held for less than 12 months to be fully taxable business income unless specific exemptions apply (death, disability, job relocation, etc.).

Key Court Decisions

In Sangha v. Canada, the court ruled that repeated buying, renovating, and selling properties constituted a business, making all gains fully taxable. In Huang v. The Queen, CRA successfully denied the PRE due to insufficient occupancy and clear profit motive. In Lalonde v. Canada, CRA reclassified a taxpayer’s gains as business income because renovations and quick resale demonstrated commercial activity. In Yates v. Canada, the court noted that even a single property sale can be treated as business income depending on intention and behaviour. These cases show CRA’s aggressive approach to real estate flipping.

Why CRA Targets Flippers

CRA monitors land registry data, mortgage files, city permits, GST/HST filings, builder licenses, renovation permits, and platform rental income. Red flags include frequent property sales, short holding periods, major renovations before resale, using multiple corporations, claiming PRE repeatedly, reporting low employment income despite expensive renovations, or claiming losses on flips. CRA also works with Revenu Québec and municipal data to detect flipping patterns.

How CRA Determines If a Property Was Flipped

CRA considers several key factors: intention at purchase, frequency of transactions, length of ownership, amount of renovation activity, financing structure, occupancy evidence, marketing behaviour, and use of realtors or staging services. If these factors point to profit motivation rather than personal use, CRA will treat the gain as business income.

The Residential Property Flipping Rule (2023)

Any residential property sold within 12 months of acquisition is deemed to produce business income, not a capital gain, unless the seller qualifies for one of the following exemptions: death of the taxpayer, serious illness or disability, addition of a family member, separation or divorce, threat to personal safety, employment relocation, involuntary termination of employment, insolvency, or destruction/expropriation of the property.

GST/HST Implications

If CRA considers you a builder or flipper, you may be required to: charge GST/HST on the sale, repay New Housing Rebates, remit GST/HST on substantial renovations, or register for GST/HST as a business. Many taxpayers are shocked when CRA audits real estate transactions and applies GST/HST retroactively.

Consequences of Being Classified as a Flipper

If CRA determines your sale was business income, the results may include: 100% of the profit becomes taxable, denial of the PRE, denial of capital gains treatment, gross negligence penalties of 50%, GST/HST assessments, loss of refunds or rebates, and multi-year real estate audits.

Mackisen Strategy

At Mackisen CPA Montreal, we defend taxpayers facing real estate reclassification. We analyze purchase intent, document occupancy, reconstruct renovation timelines, draft legal arguments, review comparable jurisprudence, prepare allocation schedules, and negotiate with CRA auditors. In flipping cases, we help clients avoid penalties, correct filings, and structure future transactions to reduce audit exposure. We also collaborate with tax lawyers when business income classification becomes legally complex.

Real Client Experience

A Montreal taxpayer selling three properties over four years faced a flipping audit; we proved genuine occupancy and converted two sales back to capital gains. An investor who renovated and sold a duplex within 10 months avoided the flipping rule due to documented medical circumstances. A condo owner categorized as a builder avoided GST/HST reclassification after we established that the renovations were cosmetic, not substantial. A taxpayer claiming PRE on multiple homes avoided penalties after we documented family use and corrected filings.

Common Questions

Is selling within 12 months automatically flipping? Yes—unless an exemption applies. Can I claim PRE if CRA considers me a flipper? Typically no. Can a single sale be business income? Yes—intention is key. Does renovating affect classification? Extensive renovations may indicate business activity. Does Airbnb use trigger flipping rules? It can—especially with short-term profit intent.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps real estate owners, investors, renovators, and homeowners avoid harsh flipping reclassifications. Whether selling a condo, multiplex, cottage, or Airbnb property, we ensure accurate tax treatment, defend against CRA assumptions, and provide strategic planning for future transactions.