Flipping a Property Too Quickly: Beware of the Tax Consequences

Since 2023, new tax measures targeting flipping property have been introduced to discourage short-term real estate speculation. Under these rules, when a residential property is sold less than 12 months after its acquisition, any profit is generally treated as business income rather than a capital gain. This treatment applies broadly to all taxpayers, including trusts.

Why Does This Matter for Trusts?

When a trust transfers real property to a beneficiary, the transaction is typically considered a deemed disposition for tax purposes. Under certain provisions of the Income Tax Act, the beneficiary is deemed to have owned the property for the same length of time as the trust. For the purposes of this discussion, this concept is referred to as the “Continuity Rule.”

For example, if the Tremblay Family Trust acquired a cottage in May 2018 and distributed it to its beneficiary, Julie, in January 2025, Julie would generally be deemed to have owned the property since May 2018 under the Continuity Rule.

This conclusion changes if Julie sells the property within 12 months of receiving it. In that case, the flipping property rules may apply, recharacterizing what would normally be a capital gain as fully taxable business income. The resulting tax impact can be significant, potentially amounting to thousands of dollars in additional tax.

Why Doesn’t the Continuity Rule Apply Here?

The Continuity Rule only applies in situations explicitly provided for in the legislation. At this time, the statutory provisions governing flipping property do not include an exception for transfers from a trust to a beneficiary.

That said, this framework may evolve. In a publication dated April 14, 2025, the Joint Committee on Taxation recommended amendments to the flipping property provisions so that, among other things, they would not apply to transfers from a trust to a beneficiary. This proposal has not yet been enacted, but it is worth monitoring.

How Can You Avoid Unpleasant Tax Surprises?

• Plan the distribution carefully : Where possible, avoid a resale by the beneficiary within the 12-month period.

• Document the reasons for the sale : Certain exceptions to the flipping property rules may apply if properly supported.

• Anticipate the tax consequences : Consulting a tax professional in advance can help mitigate unexpected outcomes.

In a nutshell

The flipping property rules are not limited to real estate speculators. They can also have major implications in trust planning scenarios. Careful tax planning and professional guidance are essential to protecting beneficiaries from unintended and costly tax consequences.