12 June 2025 External T.I. 2025-1051441E5 - Deductibility of BC Home Flipping Tax

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: Where a taxpayer disposed of residential property situated in BC and owned it for less than two years, whether the amount of taxes assessed under the Residential Property (Short-Term Holding) Profit Tax Act may be, if on account of income, deducted under subsection 9(1) and not denied by paragraph 18(1)(a), or, if on account of capital, as an outlay in respect to the disposition of the property.

Position: In the case where the disposition of residential property is on account of income, it is our view that the BC Home Flipping Tax assessed under the RPPTA is not deductible pursuant to paragraph 18(1)(a). Where the disposition of residential property is on account of capital, it is our view that the BC Home Flipping Tax cannot be deducted when computing a taxpayer’s capital gain from the disposition of residential property by virtue of not satisfying the purpose test of subparagraph 40(1)(a)(i).

Reasons: See below.

XXXXXXXXXX								2025-105144
									Troy Neave, CPA, CA

June 12, 2025

Dear XXXXXXXXXX:

Re: Treatment of the taxes assessed under the British Columbia Residential Property (Short-Term Holding) Profit Tax Act

This is in reply to your correspondence dated January 27, 2025, in which you requested our views regarding the income tax treatment of an amount assessed under the Residential Property (Short-Term Holding) Profit Tax Act (“RPPTA”), referred to herein as the “BC Home Flipping Tax.” Specifically, you asked whether, where a taxpayer disposes of a residential property located in British Columbia that was owned for less than 730 days, the BC Home Flipping Tax would be deductible in computing income if the disposition is on account of income. You also asked whether the BC Home Flipping Tax would be considered an outlay or expense made or incurred for the purpose of making the disposition if the disposition is on account of capital.

It is our understanding that the RPPTA assesses a tax in respect of a “taxable transaction” (footnote 1) held for less than 730 days on the person’s “net taxable income” (footnote 2) . Net taxable income is essentially the proceeds from the disposition less the cost of acquiring the property, the cost of improving the residential property, and other amounts specified in the RPPTA. The tax rate that is assessed on the taxable transaction is reduced from 20% to 0% on a straight-line basis based on the number of days that the taxpayer held the taxable property after the first 365 days up to 730 days. No tax is assessed if the taxpayer’s net taxable income is less than zero. The RPPTA came into effect on January 1, 2025.

Our Comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (“Act”) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

Whether in a particular situation a gain or loss from a sale of residential property should be treated as being on account of income or capital for the purposes of the Act is a question of fact to be resolved based on a complete review of all the facts and circumstances of the particular situation.

Where the disposition of a residential property is on account of income, in the course of earning income from a business or property, it would generally be included in the taxpayer’s income under paragraph 3(a) of the Act as part of the computation of profit, as required by subsection 9(1).

Where the disposition of a residential property is on account of capital, paragraph 3(b) of the Act includes in income any taxable capital gain realized by a taxpayer on the disposition of property. In this regard, subparagraph 40(1)(a)(i) provides that a taxpayer’s gain from the disposition of a capital property is the amount by which their proceeds of disposition exceed the aggregate of the adjusted cost base of the property immediately before the disposition and any outlays and expenses incurred for the purpose of making the disposition.

However, notwithstanding that a disposition of a residential property is on account of capital, if the residential property, prior to its disposition, was a “flipped property” as defined in subsection 12(13) of the Act, the gain from the disposition is deemed to be fully taxable as business income and deemed not to be on account of capital. A “flipped property” of a taxpayer means a property, other than inventory, that is, prior to its disposition, a housing unit located in Canada or a right to acquire a housing unit located in Canada, and owned or, in the case of a right to acquire, held, by the taxpayer for less than 365 consecutive days prior to its disposition, unless one or more of the "life-event exceptions" under subparagraphs 12(13)(b)(i)-(ix) apply.

Where the gain from the disposition of residential property is on account of income

Paragraph 18(1)(a) of the Act provides that in computing the income of a taxpayer from a business or property, no deduction shall be made in respect of an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property. It is a question of fact in any situation whether the conditions of paragraph 18(1)(a) are met.

The meaning of “for the purpose of gaining or producing income” as used in paragraph 18(1)(a) of the Act has been considered by the courts on numerous occasions. As a general proposition, the courts have held that an outlay or expense will not be considered to have been incurred for purpose of gaining or producing income from a business or property where the expense is incurred only if there is profit. More recently, the Federal Court of Appeal (“FCA”) expanded and clarified this proposition in respect to the deductibility of base payments paid to the province of Saskatchewan in the decision of Potash Corporation of Saskatchewan 2024 FCA 35 (“Potash”). The FCA stated:

“[34] Therefore, "income", for the purposes of paragraph 18(1)( a) of the Act, does not mean "profit" or "net income". Rather, "income", for the purposes of paragraph 18(1)( a) of the Act, means an amount that would be included in computing income for the purposes of the Act. As a result, in applying the test adopted by the Exchequer Court in Roenisch ("an expenditure which will not be incurred unless there is a profit is not an expenditure in order to earn a profit") to paragraph 18(1)( a) of the Act, the references to "profit" must be read as "income". The test would then be:

… if there is an expenditure which would be made in any case, from which [income] may accrue, the expenditure may be deducted; but an expenditure which will not be incurred unless there is [income] is not an expenditure in order to earn [income].”

In the Potash decision, the base payments paid were imposed in accordance with the quantity of potash sold by the taxpayer in a particular year. Thus, in Potash, the FCA considered the triggering event of the Saskatchewan mining taxes and whether the mining taxes were made or incurred for the purpose of gaining or producing income. The FCA stated at paragraph 39:

“In this appeal, the triggering event is not the establishment of a mine in Saskatchewan, but the sale of potash. PCS gained or produced its income by selling potash. The base payment was not incurred for the purpose of making the sale of potash; rather, it was incurred as a consequence of the sale of potash.”

Based on our review of how the tax liability is levied under the RPPTA and applying the previously cited case law to the BC Home Flipping Tax assessed under section 8 of the RPPTA, it is our view that this expenditure does not satisfy the condition of being made or incurred by the taxpayer for the purpose of gaining or producing income from a business or property. The BC Home Flipping Tax arises only when there is net taxable income under the RPPTA, and therefore the expense appears to be incurred only if there is profit. Also, the triggering event appears to be the disposition of a residential property, and therefore, the tax assessed under the RPPTA is not incurred for making the disposition but is rather incurred as a consequence of making the disposition.

In summary, where the gain from the disposition of residential property is on account of income, it is our view that the BC Home Flipping Tax is not deductible pursuant to paragraph 18(1)(a) of the Act.

Where the gain from the disposition of property is on account of capital

Subparagraph 40(1)(a)(i) of the Act provides a deduction, in the computation of a taxpayer’s capital gain from the proceeds of disposition of capital property, of any outlay or expense made or incurred for the purpose of making the disposition. The words “for the purpose of” in subparagraph 40(1)(a)(i) are directed to the action of making a particular disposition. The reference to outlays and expenses in that provision are directed to a particular disposition and does not contemplate expenses or outlays which were entered into on the occasion of the disposition (Avis Immobilien GmbH v The Queen (FCA) 97 DTC 5002; (TCC) 94 DTC 1039). Put differently, in order for an outlay or expense to be deducted pursuant to subparagraph 40(1)(a)(i), there must be a relatively immediate nexus between the expense and the disposition. Expenses and outlays that simply facilitated the disposition, or entered into on the occasion of the disposition, are not deductible under subparagraph 40(1)(a)(i).

Based on our review of how the tax liability is assessed under the RPPTA, it appears that the BC Home Flipping Tax is incurred not in making the disposition, but as a consequence of making the disposition, and thereby the expense is entered into on the occasion of the disposition. Thus, the BC Home Flipping Tax is not made or incurred for the purpose of making the disposition and is not deductible from the proceeds of disposition.

In summary, where the gain from the disposition of residential property is on account of capital, it is our view that the BC Home Flipping Tax cannot be deducted when computing a taxpayer’s capital gain from the disposition of residential property by virtue of not satisfying the purpose test of subparagraph 40(1)(a)(i) of the Act.

We trust our comments will be of assistance.

Yours truly,

Sandro D’Angelo, CPA, CMA
Section Chief
Business and Capital Transactions Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 “Taxable transaction”, “taxable property”, and “residential property” are defined in the RPPTA. A taxable transaction means a disposition of taxable property. Taxable property is a beneficial interest in residential property or a right to acquire a beneficial interest in residential property. A residential property is a housing unit located in British Columbia, and land located in British Columbia and zoned for residential use.

2 “Net taxable income”, in relation to a taxpayer, is defined in section 1 of the RPPTA and means the taxpayer’s net taxable income in respect of a taxable transaction as determined under section 11.