The federal government introduced the property-flipping rule, which became effective in 2023, over concerns that some homebuyers were flipping property and improperly reporting their profits.JONATHAN HAYWARD/The Canadian Press
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Canadians looking to leave a home to heirs as part of their estate plan need to be wary of the residential property flipping rule.
The rule, which applies to homes sold within a year of being acquired, is meant to curb the buying and selling of houses for profit. But trust and estate experts say the rule may also apply in cases in which flipping isn’t the goal.
An estate that sells a home within a year of acquiring it from the deceased might be caught by the rule if the executor and the deceased weren’t related, for example. A transfer of a home between spouses can also be caught if the home is sold within a year.
These and other transactions “can inadvertently trigger penalizing tax treatment, despite lacking any true element of short-term speculation,” wrote Richard Niedermayer, chair of Society of Trust and Estate Practitioners (Canada), and Kenneth Keung, chair of STEP Canada’s tax technical committee, in a letter to the Department of Finance about the property flipping rule in February.
They asked the government to consider changes to the property flipping legislation “to exclude dispositions arising from genuine estate planning.”
Ottawa introduced the property flipping rule, which became effective in 2023, over concerns that some homebuyers were flipping property and improperly reporting their profits.
The rule automatically recharacterizes gains realized on the sale of a home in Canada within a year of its acquisition as business income, not capital gains. That also means the seller can’t claim the principal residence exemption.
The rule includes exceptions for life events such as death, divorce or disability.
Fred Cassano, partner and national real estate leader at PwC Canada, says the flipping rule adds unnecessary complexity to the Income Tax Act. The CRA always could – and still can – determine that the profit on a home sale is business income if the agency believes a taxpayer has been flipping, he says.
However, the flipping rule now gives the CRA a bright-line test that makes it easier to target the practice without having to audit, says Stéphanie Pépin, partner with Miller Thomson LLP in Montreal.
“It’s a presumption that is irrefutable if you are not [eligible] for one of those exceptions,” she says.
Tax advisors will have to keep the flipping rule in mind when counselling clients about the sale of residential property, she says.
These are some of the estate or estate-planning transactions that may be affected:
Transfers from an estate
A beneficiary who receives a home from an estate and sells it within a year could be caught in the property flipping rule. However, there’s an exception for “the death of the taxpayer or a person related to a taxpayer.”
The CRA said in a 2024 technical interpretation that when a child sells a home they received from a deceased parent’s estate within a year of acquiring it, the flipping rule might not apply if there is “a sufficiently clear connection” between the death of the parent and the sale of the home.
However, the authors of the STEP Canada letter note that the CRA did not provide additional context in the document as to how it defines “a sufficiently clear connection.”
The authors also pointed out that the exception would not be available to beneficiaries who are not related persons under the Income Tax Act, such as a niece, nephew or friend, if they sold a home within a year.
Transfers to a spouse
A person may transfer a home to a spouse on a tax-deferred “rollover” basis during their lifetime. In general, any profit realized when the home is eventually sold is attributed back as a capital gain to the spouse who transferred it.
However, if the spouse receiving the home sells it within a year, triggering the flipping rule, the gain, going all the way back to the property’s original acquisition, is taxed as business income and the principal residence exemption is lost.
If the person transferring the home to their spouse elects out of the rollover, thereby triggering the capital gain, they could claim the principal residence exemption. However, if the spouse receiving the home sells within 365 days, the flipping rule would apply, and any gain since the transfer would be business income.
A transfer of a home to a spouse at death, followed by the property’s sale within a year, should be eligible for the death exception to the flipping rule if the transaction meets the “sufficiently clear connection” test.
Transfers to a trust
Clients often use alter-ego, spousal, or joint partner trusts to avoid probate tax or to make estate administration easier.
A property can be contributed to these trusts on a tax-deferred basis. The trust is deemed to be the home’s owner, and the home its principal residence, for all the years the client owned the home and lived in it.
However, these continuity of ownership provisions don’t apply to the flipping rule. If the trust sells the property within a year, the entire gain dating back to the original acquisition is taxed as business income.
There may also be an issue if a person who transferred a home to an alter-ego trust dies within 365 days of doing so. At their death, there’s a deemed disposition of the property held in the trust, which may trigger the property-flipping rule.
“That’s obviously an unintended consequence,” says Armando Minicucci, partner with Doane Grant Thornton LLP’s tax practice in Mississauga.
The Department of Finance released draft legislation in 2024 to add deemed dispositions on death from a trust to the list of flipping-rule exceptions, but the legislation hasn’t passed. The government stated in the 2025 federal budget that it intended to move forward with the proposal.
Transfers from a trust
A family trust can distribute a home to a beneficiary on a tax-deferred basis. When the beneficiary sells the home, they can claim the principal residence exemption for all the years they lived in the property, including for the years it was held in the trust.
However, if the beneficiary sells the home within a year of acquiring it from the trust, the flipping rule may apply, preventing the beneficiary from claiming the principal residence exemption and recharacterizing any profit as business income.