Property flipping rule: under 365 days is fully business income

What makes a property a flipped property?

Subsection 12(13) defines a flipped property as a housing unit located in Canada, or a right to acquire one, that your client owned or held for less than 365 consecutive days before disposing of it, unless the sale can reasonably be considered to occur due to, or in anticipation of, a listed life event laws-lois.justice.gc.ca. When it applies, 12(12) deems your client to have carried on an adventure or concern in the nature of trade for the whole time they owned the property, deems the property inventory, and deems it not to be capital property laws-lois.justice.gc.ca.

The rule applies to dispositions on or after January 1, 2023, and it covers rental property as well as homes canada.ca. It doesn't touch property that would already be inventory without 12(12): the definition carves that property out, so a builder or regular trader stays under the ordinary business income rules laws-lois.justice.gc.ca. The 50% rate for a gain outside the rule is confirmed on the 2026 inclusion rate page.

Which life events take a sale outside the rule?

Nine events are listed in 12(13)(b), and each one covers a sale made because of the event or in anticipation of it laws-lois.justice.gc.ca.

The 40 km test comes from the eligible relocation definition, which the CRA restates in the capital gains guide canada.ca. For flipping purposes, 12(13)(b)(vi) reads that definition without its requirement that the new work location and new home be in Canada, so a move abroad for a job can still qualify laws-lois.justice.gc.ca. The same 40 km test is at the heart of the moving expenses deduction.

The separation test is the one that catches people: a sale on day 60 of living apart is still a flipped property under (iii) unless another event applies. Get the evidence on file before the return is filed, such as the termination letter, the separation date, the medical letter or the new employment offer.

Worked example: a condo sold after 320 days is taxed on the full $40,000

Your client bought a condo on March 1, 2025 for $500,000, closing costs included, and lived in it. They sold it on January 15, 2026 for $560,000 and paid $20,000 in commission and legal fees. They sold because they wanted a bigger place, which is not a listed life event. March 1, 2025 to January 15, 2026 is 320 days, so the condo is a flipped property.

Living in the condo doesn't help: the CRA's capital gains guide says your client must pay tax if a property that would otherwise be a principal residence meets the flipped property definition canada.ca. The flipping rule doubles the income compared with a capital gain, and it removes the exemption that the principal residence exemption page would otherwise apply.

Now flip the outcome. If the condo had been a rental that sold for $510,000 with the same $20,000 of costs, the $10,000 loss would be deemed nil under 12(14) laws-lois.justice.gc.ca. Outside the rule, that rental would have produced a $10,000 capital loss and a $5,000 allowable capital loss. A loss on a home your client lived in is nil either way, because a home is personal use property.

How do you report a flipped property sale?

Report the profit as business income on Form T2125, in the year of the sale. The T4002 guide says a gain on a flipped property is fully taxable as business income, a loss is deemed nil and can't be included in net business income, and the Schedule 3 flipped property section is where your client checks whether the rule applies canada.ca. In the CRA's 2025 Schedule 3 instructions, flipped property is Part 1, ahead of the principal residence part canada.ca. The line by line T2125 detail is on the T2125 page.

Every sale of real estate since 2016 must be reported, including a principal residence canada.ca. A client who sold within a year and left it off the return can correct it, and the CRA points to the Voluntary Disclosures Program for penalty relief canada.ca. The current program terms are on the voluntary disclosure page.

Which edge cases trip accountants up?

Presale assignments are inside the rule. A right to acquire a housing unit held under 365 consecutive days is a flipped property laws-lois.justice.gc.ca, and the CRA says profit from assigning the purchase agreement is business income in the year the rights are assigned canada.ca. For a buyer who closes, the CRA says the 365 day clock restarts when they take ownership of the unit, so months spent holding the contract don't count toward the unit canada.ca.

Assignments of new homes also carry GST/HST: for a new house or condo not yet occupied, the total amount received on the assignment, including any deposit, is subject to it canada.ca. The sales tax side is on the GST on residential real estate page.

Clearing 365 days doesn't make the profit a capital gain. Once the deeming rule is off, business income or capital gain is still a question of fact canada.ca. The CRA looks at the type of property, how long it was owned, the history of similar sales, any work done on it, why it was sold and the intention at purchase, and it says a property bought to renovate and resell is business income even if your client lived in it canada.ca.

A new build sold as substantially renovated or newly constructed housing can also owe GST/HST whatever your client's original motive canada.ca. Check that before you settle the income tax side.