Discourage house flipping by replacing capital gain on short-term sales with taxable gain
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Would you like to make thousands of dollars in just a few months by doing virtually nothing? It may sound like a scam, but it is real. House flipping is becoming an attractive business in Vancouver's red hot housing market. Speculators are scooping up properties and re-selling them months later for a substantial profit.
"Realtor Mebal Meng said it's becoming more common to see properties being sold multiple times in a short period of time. One of her listings on Vancouver's west side sold for $2.7 million in November 2014, then for $3.1 million in May 2015, and again for $3.3 million in November 2015." - CTV news
What make this an attractive investment is the way houses are taxed in Canada. Putting it in numbers, a seller who made $500,000 on a house flip would be subject to 47.7 per cent tax rate, a tax bill of $238,500, but if he declare it as capital gain the tax owing is $119,250. The sellers pay $0 tax if it's the principal residence. But rules for what qualifies as principal residence and what falls under business transaction are not clear, and are based on the investor's intent. And there are concerns that some of these flippers are not paying proper tax. Canada Revenue Agency (CRA) has already audited and reassessed 41 cases since April 2015, and levied $1 million in tax to these sellers, issuing gross negligence penalties in 13 cases, amounting to about $750,000. The agency is pursuing another 128 cases.
It is time we start treating a house as home, a place to live, raise a family, and create memories. We demand a change to Tax Code of Canada to make it unambiguous:
1. Principal Residence sold:
- before 1 year of ownership: 100% of the profit is capital gain
- before 2 years of ownership: 75% of the profit is capital gain, 25% non taxable gain
- before 3 years of ownership: 50% of the profit is capital gain, 50% non taxable gain
- after 3 years of ownership: 100% non taxable gain
*A house sold in case of a life altering event will be tax exempt. These events include, but are not limited to, marriage, divorce, child birth, death of relative residing at the same address, relocation due to change of job, bankruptcy.
2. Non-Principal Residence sold:
- before 1 year of ownership: 100% of the profit is ordinary profit
- before 2 years of ownership: 75% of the profit is ordinary profit, 25% capital gain
- before 3 years of ownership: 50% of the profit is ordinary profit, 50% capital gain
- after 3 years of ownership: 100% capital gain
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