Executors generally liquidate the assets of an estate in a timely manner following an individual’s death. This may include the disposition of the deceased’s primary residence, cottage or rental property (herein referred to as a “housing unit”).

An estate may realize a gain on a housing unit if it is sold at a price higher than its fair market value on the date the individual died.  Prior to 2023, the gain would have likely been reported as a capital gain with little thought given to the timing of the disposition.

Flipped property rules

With the introduction of the flipped property (FP) rules[1] in the Income Tax Act, the Department of Finance has drawn a line in the sand that could inadvertently result in business income where the housing unit was owned by the estate for less than 365 consecutive days before its disposition.  The FP rules were originally introduced in the 2022 Federal budget with the following commentary:

Budget 2022 proposes to introduce new rules to ensure profits from flipping properties are taxed fully and fairly. Specifically, any person who sells a property they have held for less than 12 months would be considered to be flipping properties and would be subject to full taxation on their profits as business income. Exemptions would apply for Canadians who sell their home due to certain life circumstances, such as a death, disability, the birth of a child, a new job, or a divorce.

The FP rules deem a taxpayer (an estate is a taxpayer), that would have otherwise reported a capital gain from the disposition of a flipped property, to report business income from an adventure or concern in the nature of trade.  A flipped property means a housing unit that is:

• Capital property,
• Located in Canada, and
• Owned by the taxpayer for less than 365 consecutive days before disposition.

Exemption

The FP rules do not apply if the disposition can reasonably be considered to occur due to the death of the taxpayer or a person related to the taxpayer. The issue faced by the estate is that the estate is the taxpayer and the estate cannot die.  In order for the estate to relieve itself from the FP rules, the estate would need to be related to the deceased.  Canada Revenue Agency folio S1-F5-C1, paragraph 1.49 states:

“Where, in the context, a reference to the trust is to be read to include a reference to the trustee having ownership or control of the trust property, the trust will be related to each person who is related to that trustee.”

An estate is considered a trust for income tax purposes.  Therefore, as long as the executor was related to the deceased, then the deceased would be a related person to the taxpayer (i.e. the estate) and the exception to the FP rules would apply.  If the executor is not related to the deceased, the exception may not apply.  This is likely not the government’s intent, however that is how the FP rules are currently enacted.

Limited situations

There are limited situations where the new flipped property rules will apply due to the necessity for the following fact pattern:

• Housing unit sold instead of bequeathed,
• Capital gain resulted from the sale,
• Sale occurred less than 365 days of the estate’s ownership, and
• The estate is not related to deceased.

If the facts do align, then the capital gain may be deemed to be business income unless another exemption applies or one of the facts can be altered.

[1] Bill C-32 received Royal assent December 15, 2022