3 December 2024 CTF Roundtable Q. 12, 2024-1037751C6 - Property flipping rules and corporate property transfers

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether the Flipped Property Rules apply in various scenarios.

Position: General comments provided.

2024 CTF Annual Conference

CRA Roundtable

Question 12 – Property flipping rules and corporate property transfers

The flipped property rules contained in subsections 12(12) to 12(14) of the Act (the “Flipped Property Rules”) provide a deeming rule (in subsection 12(12) of the Act) that results in a gain on the disposition of a housing unit that is flipped property being fully taxable as business income. The rule applies where, if absent this deeming provision and the principal residence exemption in paragraph 40(2)(b) of the Act, a taxpayer would have had a gain from the disposition of a flipped property. 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 and the flipped property is deemed to be inventory of the taxpayer's business and not to be capital property of the taxpayer.

The term “flipped property” is defined in subsection 12(13) of the Act and essentially refers to a housing unit (or the right to acquire a housing unit) located in Canada, owned by a taxpayer (or in the case of a right to acquire, held by the taxpayer) for less than 365 consecutive days prior to its disposition, other than a disposition that can reasonably be considered to occur due to, or in anticipation of, one or more of the events listed in subparagraphs 12(13)(b)(i) to 12(13)(b)(ix) of the Act.

Consider the following situation:

• Corporation B owns all of the shares of Corporation A;
• Corporation A has owned a residential property (“Property”) for 5 years;
• The main activity of Corporation A is the rental of residential property;
• Corporation A has less than 5 full-time employees.

Can the CRA confirm the following:

a) In January 2023, Corporation A and Corporation B amalgamated. The new corporation resulting from the amalgamation of Corporation A and Corporation B (“New Corporation”) disposed of the Property in December 2023. Since the Property increased in value since its acquisition, will the Flipped Property Rules apply to the disposition of the Property? Should the Flipped Property Rules apply, will the income arising from the disposition of the Property qualify for the small business deduction (“SBD”) ?

b) If, instead of amalgamating, Corporation A was wound-up into Corporation B, would the answer to question a) be the same?

c) If the Property was transferred under subsection 85(1) of the Act from Corporation A to Corporation B in January 2023, and then sold by Corporation B to a third party in December 2023, would the Flipped Property Rules apply to the disposition of the Property?

d) If the Property was instead transferred by Corporation A to Corporation B in January 2023 at fair market value, would the answer to question c) be the same?

CRA Response (a)

In the situation described, in order to determine whether the Property could be considered a flipped property, as is defined above, we will make the following assumptions:

• The Property is a housing unit located in Canada;
• The disposition of the Property does not occur due to, or in anticipation of, one of the events listed in subparagraphs 12(13)(b)(i) to 12(13)(b)(ix) of the Act;
• The New Corporation was formed on an amalgamation of Corporations A and B pursuant to section 87 of the Act.

Accordingly, to establish whether the Flipped Property Rules apply in this situation, the issue to be considered is whether the Property was owned by the New Corporation for less than 365 consecutive days prior to its disposition by the New Corporation.

Paragraph 87(2)(a) of the Act provides that a corporate entity formed as a result of an amalgamation shall be deemed to be a new corporation. Also, according to paragraph 87(1)(a) of the Act, an amalgamation of two or more corporations pursuant to section 87 of the Act is one where, among other things, all of the property of the predecessor corporations immediately before the merger becomes property of the new corporation by virtue of the merger, subject to certain exceptions. For the purposes of the Flipped Property Rules, the new corporation is not deemed to be the same corporation as, and a continuation of, the predecessor corporations.

Thus, if the New Corporation owned the Property for less than 365 consecutive days prior to its disposition, the Flipped Property Rules could apply to the disposition of the Property, provided all other conditions for the Flipped Property Rules to apply are otherwise met. Where subsection 12(12) of the Act applies, the New Corporation will be deemed to be carrying on a business that is an adventure or concern in the nature of trade with respect to the flipped property. As well, the flipped property will be deemed to be inventory of the New Corporation’s business and will be deemed not to be capital property of the New Corporation.

The income of a Canadian-controlled private corporation (“CCPC”) from an active business carried on in Canada for a taxation year generally qualifies for the SBD under subsection 125(1) of the Act. The definition of “active business carried on by a corporation” in subsection 125(7) of the Act includes an adventure or concern in the nature of trade. Consequently, income arising from the disposition of a flipped property could be considered income from an active business and qualify for the SBD, subject to other conditions and requirements of the Act, namely the rules in section 125 of the Act.

Please note however that the CRA could, depending on the circumstances, consider applying the General Anti-Avoidance Rule (“GAAR”) under subsection 245(2) of the Act if one of the main purposes of a transaction is to obtain a tax benefit, to which the taxpayer would not otherwise have been entitled to.

CRA Response (b)

In order to determine whether the Property could be considered a flipped property, as is defined above, for purposes of question (b), the assumptions made, in the response to question (a) remain relevant, with the only difference being that the Property was acquired on the winding-up of Corporation A into Corporation B pursuant to subsection 88(1) of the Act. Furthermore, the comment on subsection 245(2) of the Act also applies.

In the case of a winding-up, if all conditions of subsection 88(1) of the Act are met, paragraph 88(1)(a) of the Act provides that each property of the subsidiary that was distributed to the parent corporation on the winding-up shall be deemed to have been disposed of by the subsidiary, subject to paragraphs 88(1)(a.1) and 88(1)(a.3) of the Act.

In general, in the context of a winding-up and for the purpose of the Flipped Property Rules, the moment of the distribution of the property to the parent corporation would generally be the start of the 365-day ownership period requirement in paragraph 12(13)(b) of the Act. That is, for the purposes of the Flipped Property Rules, the parent (Corporation B) is not considered to have owned the property for the period of time the property was owned by the subsidiary (Corporation A).

In the present case, upon the winding-up of Corporation A into Corporation B on January 31, the Property would be distributed to Corporation B. If Corporation B subsequently disposed of the Property on December 1 of the same year, Corporation B would have owned the Property for less than 365 days prior to its disposition. As a result, the Property could be considered a flipped property under subsection 12(13) of the Act and the flipped property deeming rule in subsection 12(12) of the Act could apply, provided all other conditions are met.

CRA Response (c)

In order to determine whether the Property could be considered a flipped property, as is defined above, for purposes of question (c), the assumptions made in the response to question (a) remain relevant, with the only difference being that the Property is transferred from Corporation A to Corporation B pursuant to section 85 of the Act. Furthermore, the comment on subsection 245(2) of the Act also applies.

The rules in section 85 of the Act generally enable a taxpayer (transferor), to dispose of eligible property to a taxable Canadian corporation (transferee), for an agreed amount, which may be an amount that is other than the fair market value of the property. This agreed amount, which is subject to statutory limitations, generally becomes the proceeds of disposition of the property to the transferor and the cost of the property to the transferee. A capital property of a Canadian-resident taxpayer that is real property, such as a rental property, would generally meet the definition of eligible property in subsection 85(1.1) of the Act and can therefore qualify as property that can be transferred under section 85 of the Act.

However, the Flipped Property Rules do not include a continuity of ownership rule that applies where property is acquired from a related or non-arm’s length person in circumstances where subsection 85(1) of the Act applies.

In the situation described, Corporation A transfers the Property to Corporation B in January pursuant to subsection 85(1) of the Act. If Corporation B subsequently disposed of the Property on December 1 of the same year, that is within 365 days of acquiring it from Corporation A, the Property could be considered a flipped property under subsection 12(13) of the Act. As such, the Flipped Property Rules could apply, provided all other required conditions are met.

CRA Response (d)

In order to determine whether the Property could be considered a flipped property, as is defined above, for purposes of question (d), the assumptions made in the response to question (a) remain relevant, with the only difference being that the Property is transferred from Corporation A to Corporation B at fair market value.

As mentioned above, and subject to other conditions, a property will be considered a flipped property under subsection 12(13) of the Act if it was owned by a taxpayer (or in the case of a right to acquire, held by the taxpayer) for less than 365 consecutive days prior to its disposition. The Flipped Property Rules do not include a continuity of ownership rule that applies where property is acquired from a related or non-arm’s length person or as a result of a transfer of property at fair market value.

Rachel Jacques-Mignault
2024-103775
December 3, 2024