The flipped property rules in the federal Income Tax Act (“ITA”) have raised many questions regarding property transfers since they came into effect. Although these rules were initially designed to curb property flipping, they are broad in scope and can sometimes affect non-speculative transactions, as discussed in a previous article: Navigating the federal flipped property rule. In response, the Canada Revenue Agency (“CRA”) has since published a number of interpretation bulletins clarifying the rules, including their interaction with property transfers under section 85 of the ITA.[1]

What are flipped property rules?

Generally speaking, the flipped property rules target residential properties located in Canada, and owned for less than 365 consecutive days before disposal.

Under these rules, the profit from the sale is no longer treated as capital gains (50% of which is included in income), but becomes fully taxable as business income. This recharacterization is automatic, with certain exceptions specified in the ITA.

The rules can be especially problematic for corporations transferring residential property under section 85 of the ITA. In brief, under section 85, eligible property (including certain real property other than land inventory) may be transferred to a Canadian corporation, and the parties to the transaction may determine the proceeds of disposition for tax purposes – usually no less than the cost of the property, but no greater than its fair market value.

This provision, because of the flexibility it offers, is often used to transfer property on a tax-deferred basis (deferring the latent capital gains) in corporate reorganizations, such as estate freezes, post-mortem planning, or structural streamlining.

When flipped property rules do not apply to a section 85 transfer

A recent CRA technical interpretation has confirmed that the flipped property rules will not apply where:

  • a taxpayer transfers a residential real property to a corporation; and
  • the amount elected under section 85 does not exceed the capital cost of the real property.

In other words, if the election made under section 85 allows the latent capital gains to be fully deferred, the flipped property rules will not apply even if the transfer takes place within 365 days of the initial acquisition of the real property.

This conclusion is welcomed. If the flipped property rules applied, a property otherwise subject to the rules would be taxed immediately upon transfer to the corporation, even though the parties had determined, for the purposes of section 85, that the transfer should be tax-deferred. If the flipped property rules did apply to such a transfer, the transferred real property would be deemed to be land inventory. Land inventory is not “eligible property” that can be transferred under section 85.

With that said, this flexibility has its limits. The CRA clearly states in its technical interpretation that if the amount elected for purposes of section 85 of the ITA exceeds the capital cost of the real property, thereby realizing all or part of the latent capital gains accumulated on the real property, the flipped property rules will apply.

In such a case, not only would the gains be recharacterized as business income, but section 85 itself could be deemed non-applicable.

Lastly, the CRA reiterated that the general anti-avoidance rule remains applicable where justified.

Conclusion

The technical interpretation confirms that, despite the flipped property rules, section 85 can still play a role in tax planning in some situations. However, proper planning is essential for anyone considering such a transfer.

For more details or to discuss your situation, please reach out to a lawyer from Miller Thomson’s Corporate Tax Group.

[1]     CRA, Technical interpretation 2025-1051591C6, “2025 STEP—Q.9—Flipped Property and Section 85”, June 17 2025.