When putting your second home or income property on the market, taxes are inevitable – especially if you made a profit on the sale. But there are few strategies that can help you avoid capital gains tax in Canada when you sell your home. As home prices continue to surge, here’s how to minimize how much of your profits go to the government — a fee known as capital gains tax.
Capital gains tax is a tax you pay to the government when you make a profit by selling your investment property (or something else of value) for more than you originally paid for it. For example, if you spent $310,000 on buying a house years ago and sold it for $500,000 today, then your “capital gains” would be $190,000, and you’d have to declare this amount along with your other income on your tax return. We’ll discuss how much of your profit is taxed and how that is calculated below.
There are ways to minimize your tax bill, however, and you may even be exempt from paying tax altogether if the property you sold was your primary home.
No. The CRA can charge capital gains tax on anything you sell that makes a profit including stocks, bonds, real estate investments and other assets (most retirement accounts in Canada, however, allow you to defer paying taxes on gains until you actually withdraw the money you made).
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In Canada, you only pay tax on 50% of any capital gains you realize. This means that half of the profit you earn from selling an asset is taxed, and the other half is yours to keep tax-free.
To calculate your capital gain or loss, simply subtract your adjusted base cost (ABC) from your selling price. Divide that number in half (50%) and that amount will be taxed according to your income tax bracket, the province you live in, and your personal living situation.
Your “adjusted base cost” (ABC) is your purchase price: what you paid for the property plus other costs incurred in the purchase such as commissions, legal fees and additions or improvements to the property.
Here’s an example. Let’s say that years ago you paid $250,000 for a house in Ontario. At that time, you paid $7,000 in taxes and closing fees plus another $28,000 on additions and renovations to the property. In this case, you would add all those expenses together to arrive at an adjusted base cost of $285,000. See the breakdown below:
| Original purchase price | PLUS taxes and fees at time of purchase | PLUS additions & renovations | EQUALS Adjusted Base Cost (ABC) |
|---|---|---|---|
| $250,000 | $7,000 | $28,000 | $285,000 |
Now, let’s say you sold this home for $450,000. To calculate your taxable profit, you’d subtract your ABC from the price you sold it for. Then to determine the amount that will be taxed, just divide your capital gain in half:
| Selling price | LESS ABC | Capital gain | DIVIDED IN HALF equals taxable capital gain |
|---|---|---|---|
| $450,000 | $285,000 | $165,000 | $82,500 |
Your taxable profit on the sale is $82,500, which would be added to the rest of your income and taxed accordingly by the CRA based on your personal circumstances. While the same rules apply to all gains and losses from real estate sales, the rate at which gains are taxed is ultimately based on the income tax bracket you fall into. The other half of your capital gains – also $82,500 – can be pocketed tax-free.
Yes! The CRA will allow the sale of your primary residence to be tax exempt as long as it was your principal place of residence for every year that you owned it. To claim the exemption, you must report the sale on the following tax forms:
If you don’t report the sale on these forms, then whatever profit you made from the sale of your property could be subject to capital gains tax. See the Government of Canada website for more details.
Unfortunately, you can’t. You can only avoid capital gains tax on property that is your primary residence. All other property sales are subjected to capital gains tax.
If your property isn’t exempt from capital gains tax, there are a few strategies to minimize the amount you have to pay or possibly eliminate it altogether.
A capital loss occurs when you lose money because your home (or other asset) decreases in value. As with capital gains, the loss is “realized” when you sell your home and “unrealized” if you continue to hold onto it. The CRA allows you to use your capital losses to offset your capital gains down to zero.
CRA rules allow you to offset your capital gains tax by the amount of your capital losses, which can be very useful when trying to lower you tax bill.
Even more conveniently, if you don’t have any capital gains to offset in the same year that you earned a capital loss, you have 2 options:
For example, let’s say you sold an asset and earned a capital gain of $25,000. Ordinarily, you’d take 50% of this amount – $12,500 – and declare that as your taxable income.
But say you sold another asset that same year and experienced a capital loss of $10,000. You can subtract $10,000 from $25,000 (to get $15,000) and cut the resulting amount in half, declaring this as your taxable income instead. Half of $15,000 is only $7,500, which means your income would be $5,000 less than if you had not experienced a capital loss – and less income means less taxes to pay.
Keep track of your assets, and consider selling off any that have declined in value. Doing so could provide a double benefit: you could improve your financial portfolio and decrease your tax bill at the same time.
Because the amount of capital gains tax charged is based on your income tax bracket (among other things) it’s smartest to time the sale of property for when your earnings are at their lowest so that your tax rate is lower. This could be if you or your spouse go on maternity leave or if you take a leave of absence from work, for example. The goal with this strategy is to sell your property in a year when your overall income is low to avoid paying higher tax o the asset.
Canadian financial institutions offer a number of tax-advantaged accounts you can hold investments within.
With a Tax-Free Savings Accounts (TFSA), you don’t have to declare any gains you earn and can make tax-free withdrawals as well. There is a contribution limit that places a ceiling on the amount you can contribute to your TFSA each year, but the good news is that unused contributions roll over to future years. So, you won’t lose any opportunity to grow your money if you fail to use up your contribution room in a given year.
Another popular option is to hold your investments in a registered account like a Registered Retirement Savings Plans (RRSP). Such accounts often come with features such as tax-free contributions or withdrawals and the ability to treat your contributions as tax deductible. RRSPs, in particular, allow for tax-deductible contributions and tax-free growth as long as funds stay within the plan. The account is tax-deferred, so you only pay income tax when you withdraw money upon retirement when you withdraw.
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If you have assets, such as property or corporate stocks, you can donate them to charity and use the donation to lower your capital gains tax. And if you donate assets that have grown in value since you first acquired them, you won’t be subject to capital gains tax on those assets.
So, if you just sold a $250,000 property that you originally bought for $195,000, you would normally have to count that $55,000 increase in property value as a capital gain. But if you donate the property to charity, you can avoid this and take home a large tax deduction instead.
On the other hand, if a property has lost some of its value but you still pass it on to keep it in the family, you can count the capital loss against your other income earnings.
There are tax advantages related to some expenses involved with renting, selling and moving away from your home.
Yes. As mentioned above, your primary place of residence can be exempted from capital gains tax. If you own a farm or fishing property and sell either of these for a profit, the amount you profited is exempt from capital gains tax up to a lifetime limit of $1,000,000. This deduction is claimed on line 154 of your tax return.
Farm or fishing “property” that qualifies for exemption includes:
Now that you’ve sold your property, are you looking for a new home? If you need a mortgage, check our the providers below and compare rates to find the best mortgage for you.
Knowing more about the intricacies of capital gains tax could line up your sale to maximize the profits you make on your home or investment property – and save a big headache at tax time.
Investing in property is worth it when you know what to look for and how to finance your real estate vision. To learn more about home financing including loan options, fees and terms, check out our guide to mortgages.
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