17 June 2025 STEP Roundtable Q. 9, 2025-1051591C6 - Flipped Property and Section 85

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: a) Can the CRA confirm that, in the situation described, that the flipped property rules will deem any recapture and gain to be treated as business income if Amalco sells the residential property within 365 days of the amalgamation? b) If, within 365 days of the amalgamation, Amalco sells the residential property to another corporation for share consideration and files a subsection 85(1) election, would the flipped property rules cause the election to be invalid because real property inventory cannot be “eligible property” pursuant to subsection 85(1.1) of the Income Tax Act?

Position: a) Yes, the flipped property rules may apply. b) Yes, in certain situations.

Reasons: a) For the purpose 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, in the situation described, if Amalco owns 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 applicable conditions are met. Any recapture and gains that would have otherwise been realized on the disposal of the property, if subsection 12(12) did not apply, will therefore be considered business income (i.e., profit from the disposition of inventory). (b) In the situation where Amalco transfers the property to another corporation for consideration that includes shares pursuant to section 85 of the Act, it is our view that the flipped property rules would not apply if the proceeds of disposition of the property do not exceed its capital cost such that no capital gain would otherwise be realized on the disposition of the property.

2025 STEP CRA Roundtable – June 17, 2025

QUESTION 9. Flipped Property and Section 85

A deceased individual (the “Deceased”) held 100% of the shares of a corporation (“RE Co”) which owns a long-term Canadian residential property as capital property. The estate undertakes a post-mortem pipeline and bump transaction whereby all the shares of RE Co are sold by the estate to a corporation (“Newco”) for a promissory note, and after some time RE Co is amalgamated with Newco to form Amalco.

At the 2024 CTF and APFF Roundtables, the CRA stated that an amalgamation restarts the holding period for purpose of the “flipped property” definition.

1. Can the CRA confirm that, in the above-described fact pattern, the flipped property rules deem any recapture income and gain to be treated as business income if Amalco sells the residential property within 365 days of the amalgamation?

2. If, within 365 days of the amalgamation, Amalco sells the residential property to another corporation for share consideration and files a subsection 85(1) election, would the flipped property rules cause the election to be invalid because real property inventory cannot be “eligible property” pursuant to subsection 85(1.1)?

CRA Response

The flipped property rules contained in subsections 12(12) to 12(14) of the Act (the “Flipped Property Rules”) deem certain property, in which a gain would be realized, as inventory, the disposition of which results in business income. In particular, subsection 12(12) of the Act provides that, if absent this 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. Additionally, the flipped property is deemed to be inventory of the taxpayer’s business and not to be capital property of the taxpayer.

In general terms, subsection 12(13) of the Act defines the term “flipped property” for purposes of subsections 12(12) and 12(14) of the Act to mean a property, other than inventory, that is, prior to its disposition by the taxpayer, a housing unit located in Canada or a right to acquire a housing unit located in Canada. Furthermore, the housing unit must be owned 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.

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. The new corporation is not, for the purposes of the Flipped Property Rules, considered to be the same corporation as, and a continuation of, any of its predecessor corporations. As a result, the holding period for an amalgamated corporation, such as Amalco, begins at the time of the amalgamation. Thus, in the situation described, if Amalco owns the property for less than 365 consecutive days prior to its disposition, the Flipped Property Rules could apply provided all other conditions for the application of these rules are otherwise met.

In circumstances where subsection 12(12) of the Act applies, Amalco will be deemed to carry 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 and not capital property of Amalco’s business throughout the period that Amalco owned the property. Any recapture and gains that would have otherwise been realized on the disposal of the property, if subsection 12(12) did not apply, will therefore be considered business income (i.e., profit from the disposition of inventory).

In the situation where Amalco transfers the property to another corporation in exchange for consideration that includes shares, and files an election under subsection 85(1) of the Act, it is our view that the Flipped Property Rules would not apply if, as a result of the election, the property is disposed of for an agreed amount that does not exceed its capital cost. In other words, the Flipped Property Rules will not apply in this situation, provided that the disposition of the property would not, in the absence of the Flipped Property Rules, give rise to a capital gain. However, if the property is disposed of for an agreed amount that is greater than the property’s capital cost (that is, the elected amount agreed upon by Amalco and the other corporation provides for a portion of the accrued capital gain on the property to be realized upon the disposition), then the deeming rule in subsection 12(12) of the Act would apply with all of the consequences that flow from its application. This includes causing Amalco’s subsection 85(1) election to be invalid because inventory that is real or immovable property is not “eligible property” pursuant to the definition of that term in subsection 85(1.1) of the Act.

Please note that the CRA could, depending on the circumstances, consider applying the General Anti-Avoidance Rule 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.

Christina Foggia
2025-105159