A Property Flip, Unexplained Bank Deposits, and a $133,187 Income Adjustment
A property sold after approximately one month produced an income adjustment on the property gain. A bank-deposit analysis produced a second adjustment on top of it. The Tax Court of Canada later reduced the combined figure, and it did so after working through the evidence transaction by transaction.
The case in brief
Kabir Cheema was a Calgary real estate associate who purchased a property on Falconridge Drive NE and sold it approximately one month later.
The Minister added $133,187 to income:
- $72,968 treated as profit on income account from the property disposition
- $60,219 of unreported revenue identified through a bank-deposit analysis
The $133,187 figure was an income adjustment rather than the amount of tax payable. The Court reduced the adjustment by $19,132, leaving a final increase of $114,055.
Why the property gain landed on income account
Cheema argued for capital-gain treatment. He also claimed two additional selling expenses:
- $40,500 said to have been paid to 1728778 Alberta Ltd.
- $20,000 said to have been paid to a third party
The claimed referral fees totaled $60,500. The Court rejected the claim on the basis that the documentation was ambiguous, one document was incomplete, and the arrangements appeared to describe both loans and referral fees. The Court noted the absence of witness testimony clarifying the nature of the payments.
The Court also upheld income-account treatment. The circumstances it weighed included the approximately one-month ownership period, the rapid renovations to the main floor and basement, the financial features of the transaction, and the state of the evidence that the property had been acquired as a rental investment. The short holding period carried weight as one factor among several, and it operated as an indicator within a fact-based analysis rather than as an automatic rule.
That framing matters because the transaction occurred in 2016. The federal flipped-property deeming rule applies to dispositions after 2022, which places Cheema’s transaction outside its reach.
The federal flipped-property rules for current dispositions
For dispositions occurring on or after January 1, 2023, subsections 12(12) to 12(14) of the Income Tax Act change the analysis. Three points define the regime.
Subsection 12(13) supplies the definition. A flipped property means a housing unit located in Canada, or a right to acquire one, that was owned or, in the case of a right to acquire, held by the taxpayer for less than 365 consecutive days prior to its disposition, subject to a list of excepted circumstances. Property that already qualifies as inventory sits outside the definition.
Subsection 12(12) supplies the deeming rule. Where it applies, the taxpayer is deemed to carry on a business that is an adventure or concern in the nature of trade throughout the ownership period, the property is deemed to be inventory of that business, and the property is deemed not to be capital property. The gain enters income in full.
Subsection 12(14) addresses losses. A taxpayer’s loss from a business in respect of a flipped property is deemed to be nil. A property sold at a loss within 365 days of acquiring ownership, where no exception applies, produces a loss the owner is unable to claim. The regime therefore runs in one direction: gains enter income in full, and losses disappear.
The 365-day test measures ownership or holding, and it operates independently of the period during which the taxpayer occupied the property. The excepted circumstances built into paragraph 12(13)(b) cover a disposition that can reasonably be considered to occur due to, or in anticipation of, events including the death of the taxpayer or a related person, a related person joining the taxpayer’s household, the breakdown of a marriage or common-law partnership, a threat to personal safety, serious illness or disability, an eligible relocation, involuntary termination of employment, insolvency, and destruction or expropriation of the property.
The principal residence exemption in paragraph 40(2)(b) is unavailable for a gain arising on the disposition of flipped property. Where a designation remains available, Form T2091 is generally used by an individual disposing of, or deemed to have disposed of, a principal residence. One property may generally be designated for a particular year, subject to the “plus one” rule.
The BC layer for British Columbia property
British Columbia clients face a second regime. The BC home flipping tax is imposed under the Residential Property (Short-Term Holding) Profit Tax Act, which took effect on January 1, 2025, and applies to profit from selling a property in British Columbia, including presale contracts, where the property was owned for less than 730 days.
The rate is 20 percent of net taxable income on a taxable property disposed of within 365 days, declines over the following 365 days, and reaches zero at 730 days. Properties purchased before January 1, 2025 fall within the tax if they are sold after that date and were owned for less than 730 days, unless an exemption applies.
Three features deserve attention in planning. The tax stands separate from the federal property flipping rules and receives separate administration from federal and BC income tax. A return is generally required where residential property is disposed of within 730 days, including where an exemption applies. Tax-deferred rollovers under the Income Tax Act operate independently of the Flipping Tax rules.
A BC property held for eleven months therefore attracts the federal deeming rule and the provincial tax at its full 20 percent rate on the same transaction.
How the bank-deposit analysis changed the result
The Canada Revenue Agency built its second adjustment from deposits into Cheema’s main BMO account. Cheema held other accounts and argued that some deposits represented transfers from those accounts or amounts received from third parties.
Subsection 152(7) permits the Minister to assess tax payable despite the return filed by the taxpayer or the information supplied by the taxpayer, and to assess the amount the Minister determines. The provision leaves the Minister free to select among alternative assessment techniques.
The Court rejected the argument that CRA’s decision to review a single account defeated the assessment. For cheques drawn on Cheema’s own accounts, evidence that the money moved from another personal account left the analysis incomplete. The Court held that the taxpayer also had to trace the funds within the originating account and establish their original character, since funds sitting in a personal account may themselves represent commissions or other income.
Two third-party items received different treatment:
- A $5,000 cheque was confirmed to appear in the unidentified-deposit schedule, and the Court accepted the explanation.
- A $14,132 cheque from 1842290 Alberta Ltd. was accepted after the Court concluded it formed part of a larger $17,132 deposit.
The bank-deposit component reconciles as follows:
Original bank-deposit adjustment: $60,219 Less accepted cheque: ($5,000) Less accepted cheque: ($14,132) Revised bank-deposit adjustment: $41,087
And the overall adjustment:
Property disposition on income account: $72,968 Revised bank-deposit adjustment: $41,087 Final income adjustment: $114,055
The Court directed the $19,132 reduction as the sole adjustment to the reassessment.
Reassessment beyond the normal period
The reassessment was issued outside the normal reassessment period. For an individual in the circumstances described in paragraph 152(3.1)(b), that period generally ends three years after the earlier of the day of sending the original assessment and the day of sending a notification that no tax is payable.
Subparagraph 152(4)(a)(i) permits a reassessment after that period where the taxpayer made a misrepresentation attributable to neglect, carelessness or wilful default, or committed fraud, in filing the return or supplying information under the Act. Subsection 152(4.01) confines the extended reassessment to amounts that can reasonably be regarded as relating to the misrepresentation, fraud or other applicable matter.
The Court found that the omission of the property disposition and the unreported revenue amounted to misrepresentations attributable to neglect, carelessness or wilful default, which opened the year to reassessment.
Practical documentation lessons
Document the commercial intention at acquisition. Where the intended use is rental or long-term holding, preserve contemporaneous evidence: financing documents, rental listings, advertising, lease efforts, renovation plans, and records explaining the eventual decision to sell.
Draft referral-fee agreements to describe one arrangement. Agreements, invoices, proof of payment, the parties’ roles, and the connection between the payment and the sale should tell a consistent story. A document that reads as both a loan and a commission leaves the deductible selling expense open to challenge.
Trace every deposit to its source. A notation reading “transfer” identifies the mechanism while leaving the source open. The records should identify the originating account, show the movement of funds, and establish whether the original amount was an inter-account transfer, a loan, a refund, previously reported income, or another receipt outside income.
Separate personal and business banking. Where personal accounts carry business receipts, shareholder advances, and property transactions, maintain records identifying the purpose and source of each amount.
Respond completely during the audit. Cheema confirms that a taxpayer may introduce evidence at trial. Transactions become harder to defend where the originating account statements and supporting documents were withheld during the audit.
Frequently asked questions
Does a short holding period automatically produce business income? For dispositions on or after January 1, 2023, a Canadian housing unit owned for less than 365 consecutive days meets the definition of flipped property unless one of the excepted circumstances applies, and the deeming rule then produces business income. For earlier dispositions, and for property outside the definition, the characterization rests on a fact-based analysis in which holding period is one factor.
Can CRA add bank deposits to my income? Subsection 152(7) permits the Minister to assess despite the return filed or the information supplied. Deposits that remain unexplained may be added to income, and the taxpayer carries the burden of establishing what each deposit represents.
Is a transfer from my own account enough to explain a deposit? Cheema indicates that the taxpayer must trace the funds within the originating account and establish their original character. The transfer itself explains the movement while leaving the source open.
Does the BC home flipping tax apply on top of the federal rules? Yes. The provincial tax operates separately from the federal property flipping rules and receives separate administration. A BC residential property sold within 730 days may attract both.
Where a CPA in Burnaby fits in a property transaction
Tax advice on a property transaction works the same way. The conversation before closing shapes the ownership structure, the financing arrangement, the intention evidence, and the banking practices that will answer questions two or three years later. The conversation after a reassessment arrives starts from a fixed set of facts.
At Cloudiverse CPAs Inc., we work with property owners, real estate investors, and business owners across Burnaby, New Westminster and Metro Vancouver on transaction planning, CRA audit and objection support, and the record-keeping that supports a filing position.
Book a free 30-minute discovery call: https://www.cloudiverse.ca/book-a-free-30-minute-discovery-call/
Watch the full case breakdown on YouTube: https://youtu.be/rnR3ZIefN_0
This article discusses a decision of the Tax Court of Canada for general information. It is general information and is not tax, legal, or accounting advice for any particular situation. Consult a qualified advisor about your circumstances.
Sources
Cheema v. The King, 2024 TCC 81: https://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/521286/index.do
Income Tax Act, section 12: https://laws-lois.justice.gc.ca/eng/acts/I-3.3/section-12.html
Income Tax Act, section 152: https://laws-lois.justice.gc.ca/eng/acts/I-3.3/section-152.html
BC home flipping tax, Province of British Columbia: https://www2.gov.bc.ca/gov/content/taxes/income-taxes/bc-home-flipping-tax