Cottagers who sell their property a little too hastily could be hit with a nasty tax. In its 2022 budget, the federal government introduced an anti-flipping tax law that targets anyone who buys and sells a residential property within 12 months.
The government introduced the tax to deter speculators, individuals who flip houses for a living and make a profit. “They’re buying the houses and driving up the prices, which then puts a crunch on everybody else who’s trying to buy a house to live in,” says Tara Benham, national tax leader at Doane Grant Thornton.
Many speculators also report the income they earn from flipping houses as a capital gain rather than business income. This means they’re taxed at a lower rate. For example, if a speculator sells a house and makes $100,000, they’ll only be taxed on 50 per cent of that income ($50,000) if it’s reported as a capital gain. If it were reported as business income then 100 per cent of the $100,000 would be taxed.
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Some speculators go as far as moving into the property while renovating it, and then listing it as their primary residence. This way, when they sell the house, they can use a primary residence exemption and not be taxed on any of their earnings.
The anti-flipping tax is intended to prevent this. Now (as of January 1, 2023), anyone who buys and sells a house within 365 days will be taxed on 100 per cent of their earnings. And anyone who misreports these earnings could be hit with a gross negligence penalty, amounting to 50 per cent of the additional taxes owing.
The one issue is that everyday property buyers are also vulnerable to the tax, including cottagers. For example, if you were to buy a cottage and then realize the waterfront was weedier than expected, or maybe you wanted afternoon sun rather than morning, selling the property within 12 months would make you liable to the tax.
“Basically, the default is, if you buy a residential property and sell it within 365 days, you can assume it’s 100 per cent taxable,” Benham says.
That said, there are several exceptions to the tax, including the death of the taxpayer; a new individual joining the household, such as a baby or an elderly parent; the breakdown of a marriage; a threat to the taxpayer’s personal safety; a disability or serious illness incurred after the purchase; having to relocate for work; involuntarily losing a job; insolvency; or the destruction of the property against the taxpayer’s will.
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One bright spot is that this tax could deter speculators from flipping properties in the cottage market. Cottages are hot commodities for speculators right now. In April, Re/Max predicted that the average price of a cottage in Ontario would increase by 33 per cent in 2024. (In comparison, the Greater Toronto Area saw its benchmark home price dip by 3.3 per cent in October.) With speculators unable to flip cottages as quickly, it could slow the market down.
But Benham points out that with cottage prices still going up, the tax has yet to prove its effectiveness. “Any effect that it was going to have probably is already rolling through, because it’s been almost two years,” she says, “so it hasn’t had a large impact.”
None of this should deter potential cottage buyers from purchasing a property, though. Benham advises that you just need to be certain about your investment. “If your life is unstable and you don’t know what’s happening within the next year, maybe you don’t buy,” she says.
B.C. buyers should also keep in mind that the province has its own anti-flipping tax. The tax will apply to any property sold on or after January 1, 2025 that was bought less than two years prior. If sold within the first 365 days, sellers have to pay 20 per cent of income earned. The tax then decreases over the second year. This tax is separate from the federal tax and paid on top of it.
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