How to Avoid Capital Gains Tax on Property in Canada
If you have been wondering what capital gains tax is or how to avoid capital gains tax in Canada, this article is for you.
Capital gains tax is what you have to pay when you sell a capital property (any depreciable property that was purchased for investment purposes or to earn an income). Understanding how to manage capital gains tax is important because 50% of what you make from selling your investment is added to your income tax amount at the end of the year.
- Capital gains tax must be paid in Canada after a property is sold.
- 50% of what you made selling the property will be added to your annual income amount and will be taxed.
- You can use strategies to reduce the amount of tax you have to pay on the sale of certain properties, like a principal residence exemption.
- Using legal exemptions is different from tax evasion because it is legal.
- How To Minimize Capital Gains Tax on Rental Properties
- What Is Capital Gains Tax?
- How To Calculate Capital Gains Tax on the Sale of a Property
- How Capital Gains Tax Works
- Make Tax Preparation Simple with FreshBooks
- Frequently Asked Questions
How To Minimize Capital Gains Tax on Rental Properties
There are certain exemptions and deductions that Canadians can use to avoid capital gains tax, minimizing the amount of tax owed after selling rental properties. The following are some of the most popular:
1. Exemption for Principal Residences
If you sell the place that was your principal residence, you must still report the sale, but you may be exempt from paying capital gains tax if you do not sell the home within 12 months of purchasing it.
Some exceptions to the principal residence exemption apply, including death, disability, a new job, divorce, or the birth of a new child.
If you did not live in the home the entire time you owned it, the exemption will only be given for the number of years it was your principal residence.
2. Make a Gift or Inherited Property Your Principal Residence
If you inherit a home or are gifted property, consider making it your official principal residence, moving in for a year, before selling.
If the property was the primary residence of the person passing it to you, and it becomes your primary residence, then the estate will not owe capital gains tax when you take possession, and you can sell the property without owing high taxes on the profits.
3. Incorporate Your Rental Property Business
If you incorporate your rental property business, you transfer the ownership of the property to the corporation, which then makes the corporation the legal owner.
When the property is sold, the capital gain will be taxed at a corporate tax rate, which is usually much lower than the personal tax rate, saving you money on your tax bill.
4. Put Your Earnings in a Tax Shelter
If you put the earnings from the sale into a Registered Retirement Savings Plan (RRSP) or another tax shelter, you can then reduce your overall taxable income, which will make your tax bill lower. This strategy should only be used after talking to a tax professional.
5. Make Use of the Capital Gains Reserve
You can claim a reserve if you receive the full payment for your property over a number of years rather than getting the full amount right away.
A reserve will usually allow you to report just a portion of the full capital gain every year rather than the full amount.
Some situations in which you cannot claim a reserve are:
- If you were not a resident of Canada or were otherwise exempt from paying taxes at the end of the tax year or at any time in the following year
- You sold the property to a corporation that you control in any way
6. Capital Losses Offset
50% of any capital losses can be applied against capital gains in the year. If you have sold multiple properties but have lost money on some by selling them for less than their adjusted cost base, you can apply up to half of these losses to offset the gains from other properties. Make sure to consult a tax expert if you plan to use this strategy.
7. Carry Forward Your Losses
You can use a net capital loss from years ago to reduce your taxable capital gain. Capital losses can be carried forward indefinitely in Canada, but they can only be used to offset capital gains, not any other type of income.
To find out what your capital loss balance is, sign into your myCRA account portal, and follow the Carryover Amounts link.
FreshBooks accounting software keeps receipts and records organized and helps ensure you have everything you need for tax preparation, so you can maximize deductions and report your earnings properly.
What Is Capital Gains Tax?
Capital gains tax can be charged from the sale of land, buildings, shares, bonds, and real estate investment trust units. Some examples of selling capital property include:
- Exchanging one property for another
- Settling or cancelling a debt owed to you
- Leaving Canada (emigration)
- Your property is destroyed or stolen
- Giving property as a gift
You may not have a “gain” with many of these scenarios, so you will not have to pay tax, but when you make more from the sale than the original purchase price, you must pay income taxes on the additional earnings.
How To Calculate Capital Gains Tax on the Sale of a Property
When you calculate this tax amount, you first need to figure out if the proceeds of disposition are more than the adjusted cost base.
- The proceeds of the sale are the amount you sold the property for after outlays and sales expenses are deducted.
- The adjusted cost base is what you paid to purchase the property in the first place, along with any costs related to the purchase (legal fees, etc.).
If the proceeds are higher than the adjusted cost base, this is called “capital gains”. The inclusion rate for this amount is 50% in Canada, meaning you will take the total amount of gains, divide the number in half, and add that number to your total income on your tax return. You will then pay tax on it at your marginal tax rate.
How Capital Gains Tax Works
When you sell assets like real estate or stocks, the tax payment owed on these sales is calculated using the difference between the sale price and how much you acquired it for.
This gain must be reported on your tax return in the year the asset was sold. The income from the sale is 50% of the capital gain. You will then pay income tax at your marginal tax rate based on your tax bracket.
Make Tax Preparation Simple with FreshBooks
FreshBooks accounting software can help Canadian property owners effectively manage their finances, stay organized, and potentially reduce capital gains tax liability at the end of the tax year. Try FreshBooks free and find out how easy tax time can be when you use professional accounting software.
If you want to explore the topic of tax deductions further, please see our article about tax write-offs for small businesses in Canada.
FAQs About Capital Gains Tax On Property
Please read on to find out more about capital gains and losses incurred from selling property, real estate, and other depreciable property in Canada.
Do you have to tell CRA that you sold your house?
Yes, you have to report it, even if you sell the home at a loss or if it is your principal residence. You will not have to pay capital gains tax unless it is an investment property and you make a profit on the sale. If you do not report the sale, it could be considered tax evasion.
Can you defer capital gains tax on real estate in Canada?
Yes, if the property was your principal residence the entire time you owned it, you do not have to pay tax on your gain.
You can also use past capital losses to offset your gains from a property sale or, in some cases, do what is known as a “rollover”, in which you transfer the property to another person, trust, or corporation.
Can you sell a rental property and not pay capital gains in Canada?
You may be able to by taking advantage of legal exemptions. You can make it your principal residence before selling, you can incorporate your rental property business, move your earnings to a tax shelter, or you can try carrying forward your losses from previous years to offset capital gains.
It is always a good idea to consult a tax professional before using strategies such as these to ensure your actions remain legal.
Is gifted property taxable in Canada?
Yes. In Canada, gifted property is considered as having been sold at the fair market value, so if you want to “sell” a house to your son for $1, it will still be taxable at the full market value that year.
If you inherit a deceased person’s primary home, the transfer to you will be tax-free. To be able to sell the home and avoid capital gains tax, you could make it your primary residence first.
About the author
Kristen Slavin is a CPA specializing in accounting, bookkeeping, and tax services for small businesses. In addition to her 16 years experience in the accounting field, she also holds a Master’s Degree in Business Administration. In her spare time, Kristen enjoys camping, hiking, and road tripping with her husband and two children. In 2022 Kristen celebrated opening her own firm; K10 Accounting. Learn more about her services: www.k10accounting.com