CRA finds that the flipped property rule does not apply to a sale to avoid future insolvency
Although s. 13(12) deems the gain of a taxpayer from the disposition of a housing unit within 365 days of its acquisition to be an inventory gain, s. 12(13)(b)(viii) provides an exception for a disposition which inter alia can reasonably be considered to occur in anticipation of the taxpayer’s insolvency. CRA indicated that this exception might apply where an individual disposed of a housing unit to improve a declining financial situation (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 basic needs). It stated that the exception applied where the taxpayer disposed of the housing unit “due to or in anticipation of the inability or lack of means to pay their debts as they become due” and that:
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.
In other words, “anticipation” of insolvency includes reasonable “avoidance” of insolvency – even where the individuals concerned may have been the authors of their own misfortune.
Neal Armstrong. Summary of 30 January 2024 External T.I. 2023-0991461E5 under s. 12(13)(b)(viii).