New rules:

Upon resale of a property, half of the capital gain realized,^[1] if you are an individual, will be taxable. However, if the property was your principal residence and you lived there for all the years during which you owned it, you could be exempt from tax at both levels of government. The capital gain realized on the resale would then be tax-free, which is called the principal residence exemption.

Only one residence can benefit from this exemption per year and per family unit. Furthermore, if the residence is used in part to generate income, the exemption will apply only to the percentage inhabited by the owner. And if the property does not qualify as a principal residence, 50% of the capital gain realized upon resale will be taxable.

In late 2022, the federal parliament adopted a new rule concerning the flipping of residential properties.^[2] It was put in place to counter quick resales (flips). Its purpose is to discourage a person who wants to buy a property solely to make a short-term gain that would only be taxable at 50% or who could benefit from the principal residence exemption. For parliament, the purpose of the increase in the tax rate on a capital gain realized on a flipped property is essentially to make housing more affordable and more accessible by penalizing investors whose only intention is to make a quick profit.

Thus, since January 1, 2023, the gain realized on the resale of a residential property in the year following its purchase is taxed entirely as ordinary income from a business^[3] and is therefore taxable at 100%, instead of being taxed as a capital gain at 50% or even being exempt from tax under the principal residence exemption. There is now a presumption that it is business income, which means that the owner seller will not be able to use the principal residence exemption within 365 days of the initial purchase of the property and will also not be able to benefit from the fact that only 50% of a capital gain is taxable, save in certain exceptional cases.

As for a residential property sold more than 12 months after purchase, there is no change in the law, since the goal of the federal budget was to target investors who profit from flipping properties. The law maintains the principal residence exemption for owner sellers who actually use their home as their principal residence.

Of course, there are some exceptions^[4] to these new rules, in particular in the case of:

• a separation (couple living separate for at least 90 days before the resale)
• the death of the owner or a member of their family
• the growth of the family
• security threats
• serious illness or incapacity
• moving for professional reasons
• a layoff
• expropriation of the property
• its destruction by fire

If any of these situations arise, the new rules should not apply.

Know, however, that even in the event of one of these exceptions, the proceeds from the sale of the property could be considered income taxable at 100%. The facts of the situation will determine whether or not the rules apply.

Certain circumstances established by the courts could weigh in the balance, in particular:

• the intention of the taxpayer at the time of purchase
• the location of the property
• proof that the intention changed after the purchase
• the nature of the business or profession of the buyer
• the financing terms
• the period during which the buyer owned the property
• the factors that motivated the sale

The profit made on a sale is generally considered business income when the property was acquired with the intention of reselling it. Intention remains a key factor in determining the qualification of the income when a property is sold.