What is a capital gain or capital loss?
A capital gain is an increase in an investment, such as real estate holdings. When you sell a capital property for more than you paid, you have a capital gain. You must include this gain on your annual income tax return and are taxed a percentage (referred to as the inclusion rate) of that gain.
A capital gain is either “realized” or “unrealized.” When you sell real estate for more than you purchased for it, your capital gain is realized. An unrealized capital gain is when your investment increases in value, but you have not sold it, and therefore is not considered a taxable capital gain.
A capital loss is incurred when there is a decrease in the capital asset value. A capital loss occurs when the value of your real estate holdings decreases to less than the original purchase price.
How are capital gains taxed in Canada?
In Canada, the capital gains inclusion rate is 50%. When investors sell a capital property for more than they paid for it, the Canada Revenue Agency (CRA) applies a tax on half (50%) of the capital gain amount. You must pay taxes on 50% of this gain at your marginal tax rate. For example, on a capital gain of $10,000, half of that, or $5,000, would be taxed based on the individual’s tax bracket and the province of residence.
How do you calculate a capital gain or loss on a recently sold property?
According to the CRA, to calculate your capital gain or loss, you need to know the following amounts:
- The proceeds of disposition: This refers to the sale price of the investment property, and the amount you received or will receive for your property.
- Adjustment cost base (ACB): This refers to the cost (plus expenses paid to acquire it, such as legal fees) you initially paid for the property.
- Outlays and expenses incurred to sell your property: These are the costs that you incurred to sell your capital property. These types of expenses include legal fees, fixing-up fees, finders’ fees, commissions, brokers’ fees, surveyors' fees, advertising costs, and transfer taxes.
How can you keep more capital gains when selling a property in Canada.
In Canada, there are several strategies you can use to legally lower the amount you pay on your capital gains tax when you sell an investment property.
Use capital losses to offset capital gains:
Capital losses can be used to offset capital gains and reduce the overall amount of tax you pay. In fact, the CRA allows you to use your capital losses to offset your capital gains down to zero. You can carry capital losses back 3 years to amend your prior tax bill(s). You may also carry your capital losses forward into future years to reduce capital gains in the future. Conditions apply, so be sure to check with a tax professional to ensure all your details are accurate.
Time the sale of your property with your earnings:
Capital gains tax is charged based on your income tax bracket (among other things), so the best time to sell your investment property is when your earnings are at their lowest so that your tax rate is lower. Pay attention to your overall earnings during each calendar year. The goal is to wait and sell your real estate asset during a year when you know your earnings will be less so you can avoid paying higher tax on the asset.
Use tax shelters to help minimize taxes paid:
There are several tax-advantage accounts you can use to hold investments within, such as a Registered Retirement Savings Plan (RRSP) or a Tax-Free Savings Accounts (TFSA). With these accounts, you can make tax-free contributions or withdrawals, and have the ability to treat your contributions as tax-deductible. You don’t have to worry about capital gains and losses because the investments are tax-sheltered. Your investments can continue to grow without you worrying about changes in value until you withdraw the funds.
Use the lifetime capital gain exemption:
Do you own a small business, a farm or a fishery property? In Canada, when you make a profit from selling a small business, farm property or fishing property, you may be allowed a specific deduction on your capital gain. To learn more about the lifetime capital gains exemption, visit the CRA website.
Take advantage of the principal residence exemption:
Do you own and live in one home? With the principal residence exemption, you are exempt from paying a capital gain tax when you sell your designated principal residence. Your principal residence may be a house, cottage, condominium, apartment building, or a trailer, mobile home, or houseboat. Your principal residence does not have to be a place you live all the time, it just has to be the place you lived in at some point during the year. For example, a seasonal residence, such as a cabin, vacation home, or lake house may be considered a principal residence if you resided in it for some time during the year. To see if you qualify for the principal residence exemption, visit the CRA website to view the outlined criteria.
Do you need help reducing your Canadian capital gains tax?
When filing personal income tax returns, knowing how to accurately report a property sale can be confusing and expensive. With the help of our team of professional Nanaimo accountants, we can help you minimize your capital gains tax and make sure you don’t pay more tax than required. If you have any questions in regards to Canada capital gains taxes, contact our CPA Nanaimo team today, and we’d be happy to answer any questions you may have.