Explore how recent changes in the Canadian tax code affect calculating taxes on real estate sales, including capital gains and strategies to reduce tax liabilities.
Update: Please be advised this revised article on real estate income taxes reflects recent amendments in the Canadian tax code regarding capital gains, offering updated insights into payable taxes for property investors.
Selling real estate can be a very profitable venture. However, it is important to stay compliant with the CRA's tax code. In this Canadian real estate income guide, we discuss the basics of calculating the taxes related to selling capital assets, as well as share several strategies to lower the tax amounts a person must pay when selling real estate.
The term capital gains tax refers to a type of fee that must be paid when an asset is sold for profit. Capital gains taxes are paid when selling personal property such as real estate and cars as well as securities like stocks and bonds.
A capital gain is achieved when an asset is sold for a higher value than its adjusted cost base (ACB). The ACB is calculated by adding up the purchase price of the asset and any acquisition costs. Examples of common acquisition costs include legal fees and commissions.
In the United States, the Internal Revenue Service (IRS) makes a distinction between long-term and short-term capital gains, with the long-term capital gains tax rate being much lower.
However, this difference does not exist for the Canadian Revenue Agency (CRA). Individuals who wish to achieve a reduction of income taxes in Canada can opt for a series of strategies such as donating to a charity or funding an RRSP. By hiring the services of a certified public accountant, you can drastically lower the amount of capital gains taxes you pay.
While it is commonly thought that capital gains on real estate are taxed at a 50% rate, this is not accurate. The 50% figure refers to the fact that only half of the capital gains are taxable. This is where things will change on and after June 25th, 2024, given the recently announced budget by the Federal government. The changes are as follows
Past June 25th, these rules apply differently for individuals and corporations. While all capital gains for corporations beyond that date will be taxed at the inclusion rate of 66.7%, this isn’t the case for individuals. Any gains realized prior to June 25, 2024, will continue to adhere to the existing 50 percent inclusion rate. This rate will also be applicable to the initial $250,000 of capital gains realized starting from June 25 onwards. However, the new 66.7 percent rate will solely apply to any surplus gains exceeding $250,000 realized after June 25. This essentially means you can earn up to $500,000 in capital gains in 2024 before being taxed at the inclusion rate of 66.7%.
Following in the footsteps of the federal government on April 18th, the Government of Quebec announced that it would be amending the Quebec tax legislation and regulations to incorporate equivalent measures.
Capital gains tax rates depend on the amount of income received. Capital gains from the sale of land and other tangible assets must be added to a person's yearly taxable income. They must be filed alongside money received from an individual's job, their side gigs, and dividends in non-registered accounts.
Married people have an advantage over single taxpayers when it comes to the transfer of real estate. If real estate is transferred to a spouse or common-law partner, capital gain tax burdens are avoided. The estate is considered a gift at the time of closing the sale, giving married taxpayers no capital gain payment obligation.
Individuals should assess if they prefer to realize capital gains before June 25, 2024, to take advantage of the 50% rate instead of facing the 66.7% rate. For instance, they should deliberate on not claiming a capital gain reserve available in their 2023 income tax return. The same goes for corporations holding onto large amounts of real estate or investments that have earned strong returns. The adverse effect could be a wave of sell-off to crystallize gains at the 50% rate before they increase to 66.7%.
When selling real estate in Canada, capital gains taxes will now need to be paid on 66.7% of the profits for corporations and trusts and at 66.7% on any amount over $250,000 for individuals. Nonetheless, individuals are eligible for a capital gains tax exclusion if the property they're selling is their primary residence.
A parcel of land and everything permanently attached to it, natural or artificial, is recognized as real property. This includes primary homes, multi-family homes, commercial and industrial properties, and agricultural land. The owners of real properties have the right to possess, sell, or lease them.
Personal property such as furniture or vehicles is not considered real property. With the exception of a person's primary residence, the capital gains of all real property are subject to taxation when sold. Individuals selling real estate must add the money made from the sale of land and buildings to their ordinary income tax rate.
A person who sells their home does not have to pay capital tax gains as long as the property was their principal residence for every year they owned it. However, if at any time during the ownership of the property it wasn't their sole principal residence, they may not be exempted.
There is no flat rate for real estate income tax in Canada. The tax rates for all capital gains depend on the amount of income acquired.
Money from real estate transactions must be added to an individual's yearly income. When you file your tax return, you must include taxes of capital gains alongside your standard income. When paying taxes in Canada, you must break your total tax into the appropriate tax brackets, including any capital gains taxes.
Calculating the real estate rental income tax rate is done by first determining income from rent. To do this, one must multiply the monthly rent amount by the number of months in the year and then divide that amount by the current worth of the property. The expenses associated with renting property can be deducted from rental income, but this usually must be done in the year that they're paid.
The initial equation to calculate capital gains is quite simple. All you have to do is take a property's purchase price and subtract the sale price. Afterward, 66.7% of the capital gain amount is considered taxable for corporations. For individuals all gains up to $250,000 will continue to be taxable at the 50% rate with any excess gain above $250,000 now taxable at the 66.7% rate
For example, a property acquired for $250,000 with a selling price of $350,000 has a capital gain of $100,000. Previously only 50% of capital gains would have been taxable, this means that only $50,000 out of those $100,000 are subject to taxation. With the new regulations, corporations would pay taxes on ~$66,700 and for individuals $50,000 given the gain is less than $250,000. If the property is under an individual's personal name, then the taxable gain must be added on top of their other income and are subject to the marginal tax rate of their respective tax brackets.
In a more comprehensive example for individuals, let’s assume you purchased a property for $250,000 and are now selling it for $650,000, representing a gain of $400,000.
The taxes on business properties are calculated in a slightly different manner. If the property owner is a person's corporation or a limited liability company, then the taxable portion may be considered passive income and taxed at a different rate.
The Canadian tax code allows taxpayers to claim the wear and tear of a property to defer their rental income. This is a capital deduction for tax purposes known as a capital cost allowance. In a residential property, the building itself is the largest capital asset affected by capital cost allowance.
However, the land is exempt from this tax benefit. If 90% of the value of a property belongs to the building itself and 10% belongs to the land, then the capital cost of the property is 90% of its sale price. Some equipment may also be eligible for capital cost allowance, although at a different depreciation deduction rate. Capital cost allowance can be deducted against other assets, including rental property income.
One can reduce recapture tax by using the capital cost allowance of a second property against the property being sold. If the time of sale of an investment property falls within the same calendar year, the capital losses can be used as a tax credit to offset capital gains.
Likewise, capital gains taxes from property sales may be lowered by already having other capital assets with unrealized capital losses. This cost recovery method can be achieved via losses on any stock or mutual funds in any unregistered accounts.
The personal income tax law has special rules that allow homeowners to reduce the taxes they owe when selling real estate properties.
As previously discussed, personal use property used as a primary residence is allowed capital gains exclusions.
To qualify, the property must fulfill the following eligibility requirements:
Just as a capital gain represents the money earned when selling for a profit, the sale of property for a value lower than its ACB is known as a capital loss. Not only are capital losses eligible for standard deductions, but they are also useful to offset taxes on capital gains.
One can lower the taxes owed over the sale of any type of capital asset (not only property) by applying capital losses to the taxable amount. This method of capital distribution can be achieved through losses from other properties, investments in non-registered accounts, and other forms of capital.
The costs necessary to sell a property can be subtracted from capital gains, thus lowering the amount of taxes that must be paid. These include:
Should you require guidance navigating the intricacies of the latest tax regulations or seek clarity on managing your unrealized capital gains, we encourage you to connect with one of our seasoned CPAs at Stamped. Our experts are poised to provide comprehensive assistance and lead you through the necessary steps with confidence.
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