2023-0991461E5 Residential Flipped Property Rules - Insolvency

Principal Issues: Whether the insolvency life-event exception, pursuant to subparagraph 12(13)(b)(viii) of the Act, is met where an individual owned a housing unit for less than 365 days, and disposed of the housing unit because they do not have the means to meet their basic personal expenses.

Position: Question of fact.

Reasons: Pursuant to subparagraph 12(13)(b)(viii), a "flipped property" does not include a housing unit located in Canada which was owned for less than 365 consecutive days where the disposition can reasonably be considered to occur due to, or in anticipation of, the insolvency of a taxpayer. Whether a particular taxpayer is insolvent or anticipating becoming insolvent is a question of fact.

Author: Wallace, Ryan
Section: 12(12), 12(13), 12(14)

XXXXXXXXXX                                                       Income Tax Rulings Directorate
                                                                               Ryan Wallace, CPA

                                                                               2023-099146

January 30, 2024

Dear XXXXXXXXXX:

Re: Residential Flipped Property Rules – Insolvency Life-Event Exception

We are writing in response to your email of September 19, 2023, wherein you requested our views on whether the insolvency life-event exception, pursuant to subparagraph 12(13)(b)(viii) of the Income Tax Act (“Act”), would apply such that a housing unit would not be considered a “flipped property,” as defined in subsection 12(13) of the Act, in a situation where an individual disposes of their housing unit to improve their declining financial situation. In the situation you provided, the individual was selling their housing unit because they could not pay for all of their personal expenses. The costs associated with the housing unit caused the individual to have severe cash outflows resulting in maximizing credit cards in order to pay for their basic needs.

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 provides a deeming rule that results in a gain on the disposition of a “flipped property” being fully taxable as business income. If the disposition of the flipped property would have otherwise resulted in a gain (in the absence of this deeming rule and the principal residence exemption) 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;

* the flipped property is deemed to be inventory of the taxpayer's business; and

* the flipped property is deemed not to be capital property of the taxpayer.

Pursuant to subsection 12(13) of the Act, a “flipped property” of a taxpayer means a property, other than inventory, that is, prior to its disposition, a housing unit located in Canada or a right 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, unless one or more of the “life-event exceptions” under subparagraphs 12(13)(b)(i)-(ix) apply. Additionally, subsection 12(14) of the Act denies any losses from the disposition of a flipped property.

The insolvency life-event exception, under subparagraph 12(13)(b)(viii) of the Act, provides that a housing unit will not be a flipped property if the disposition of the housing unit can reasonably be considered to occur due to, or in anticipation of, the insolvency of the taxpayer. Since the word “insolvency” is not defined in the Act, we would therefore rely on its ordinary meaning in the context of the insolvency life-event exception. Black’s Law Dictionary defines “insolvency”, in part, as “the condition of a person who is insolvent; inability to pay one’s debts; lack of means to pay one’s debts…or the condition of a person who is unable to pay his debts as they fall due…”.

It is a question of fact whether a housing unit was sold due to, or in anticipation of, the insolvency of the taxpayer. Where it can be established that a taxpayer has disposed of a housing unit located in Canada, which was owned for less than 365 consecutive days, due to or in anticipation of the inability or lack of means to pay their debts as they become due, then the housing unit will not be considered a flipped property. This could include circumstances where a taxpayer is relying on other forms of debt (such as credit cards) to pay for their basic personal expenses, the situation is expected to continue or has been ongoing for some time, and disposing of the housing unit would allow them to significantly improve their financial situation, thereby avoiding insolvency or becoming insolvent. It should be noted that the insolvency life-event exception under subparagraph 12(13)(b)(viii) of the Act is not limited to the taxpayer being unable to pay a specific debt relating to the housing unit.

We note that where the deeming rule under subsection 12(12) of the Act does not apply because a property is not considered a flipped property (due to a life-event exception applying or because the property was owned by the taxpayer for at least 365 consecutive days prior to the disposition), it would still remain a question of fact whether profits from the disposition of a housing unit are taxed as business income or a capital gain. For example, if an individual acquired a residence with the intention of renovating it and selling it for profit, the related gain (or loss) would be on account of income (i.e., business income) even if a sale was hastened due to financial difficulty.

We trust our comments will be of assistance.

Yours truly,

Pamela Burnley, CPA, CA
Manager
Business and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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