CRA indicates that the s. 12(12) rules do not apply to residential capital property transferred on a full (but not partial) s. 85(1) rollover basis

An estate engaged in a post-mortem pipeline transaction in which it sold all of its shares of a corporation holding a long-term residential property to a Newco for a note then, after some time, the two corporations amalgamated to form Amalco. If Amalco sold the residential property within 365 days of the amalgamation on an s. 85(1) rollover basis to a corporation for share consideration, would such election be invalid on the basis that real property inventory could not be “eligible property” pursuant to s. 85(1.1)?

CRA indicated that the flipped property rules would not apply if the agreed amount in the election did not exceed the property's capital cost, given that such rules do not apply if the disposition of property would not, in the absence of the flipped property rules, give rise to a capital gain. However, if the agreed amount was greater than the property’s capital cost so as to realize a portion of the accrued capital gain, then s. 12(12) would apply so as to deem the property to be real estate inventory that was not an “eligible property,” thereby rendering the s. 85(1) election invalid – so that the full accrued gain would be business income.

Neal Armstrong. Summary of 17 June 2025 STEP Roundtable, Q.9 under s. 12(12).