Buying and selling property in Canada can earn you significant gains, but it also comes with a hefty tax bill. The Canada Revenue Agency (CRA) imposes tax on any gain on the sale of capital assets, which includes buildings, land, cottages or equipment used for a business, shares, bonds and mutual fund trust units. Note that principal residence is not a capital asset, as capital is something used to earn business income.

Why Is it Important to Plan for Capital Gains Tax?

When you sell a capital asset, the CRA allows you to deduct

• Cost at which you purchased the property
• Renovation costs and legal fees paid to acquire the property 
• The cost incurred to sell the property – legal fees, selling commissions, surveyors’ fees, repair costs, finders’ fees, brokers’ fees, advertising costs and transfer taxes. 

The amount left after the above deductions is capital gain, and 66.67% of this gain is added to the taxable income for corporations. For individuals, 50% of the gain is added to the taxable personal income up to the capital gain of $250,000 and 66.67% on any capital gain above that.

For instance, John sold a property for $1,250,000, on which he made a capital gain of $300,000. His capital gain would be

   5% of $250,000 = $125,000

+ 66% of $50,000 = $33,000

= $158,000

If John’s effective income tax rate is 20.5%, his capital gains tax would be $32,390.

Capital gains tax can result in a huge tax liability, so one should plan before selling the property. Thankfully, the CRA offers various tax benefits and exemptions to reduce this liability.

Tax Breaks to Reduce Capital Gains on Property

Principal Residences Exemption

A house in which you live is not a capital asset. If you sell your home for a gain, it is tax-free under the principal residence exemption. To qualify for this exemption, you must declare the property as your principal residence in your tax returns and should not sell it within 12 months of purchasing it. However, you still have to report the sale in your tax returns.

You can also use the principal residence exemption to gift your house to your children. When you transfer your principal residence to your children, it is a deemed sale. Your children have to report the capital gain and pay tax on it. However, your children can save the capital gain tax by making the inherited/gifted property their official principal residence by reporting it in tax returns and moving in it for a year. They can sell this new principal residence after 12 months without owing a high tax liability.

Exemptions can get messy as there are many exceptions and eligibility criteria. You may want to consult a tax advisor to ensure you qualify for this exemption.

Using Capital Losses

You can also use capital losses (loss on selling non-depreciable assets like stocks, mutual funds, and real estate property) to offset capital gain. The capital loss is calculated similarly to capital gain, and the 66% inclusion rate applies. Suppose you had a capital loss of $100,000. You can use a $50,000 capital loss to offset the capital gain. You can carry forward the capital loss indefinitely or take it back three years to offset capital gain only, meaning you cannot use capital loss from share sales to offset business profit.

Talking to a tax consultant to ensure capital loss is used correctly is a good idea.

Using Capital Gains Reserve

Using the Capital Gain Reserve, you could also defer a capital gain on real estate for up to five years. In this, you will receive the payment of property in installments over some time, and you will declare the capital gain in portions. This method is only beneficial if you fall under a lower tax bracket in the coming years. If your tax bracket increases from 20% to 30%, the tax deferral will increase your tax liability as the capital gain is included in your taxable income.

To avail of the capital gains reserve, you must submit Form T2017 in Schedule 3 of the Personal Tax Return. You cannot claim a reserve if

• You are a non-resident 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 directly or indirectly.

Incorporate Rental Property Business

If you have a rental property business wherein you lease properties to tenants, you could consider incorporating the company. By incorporating, you can transfer the ownership of the property to the corporation, and any capital gain on the sale of the property will be taxed at a lower corporate tax rate. However, the CRA has reduced this advantage by increasing corporations’ capital gain inclusion rate to 66.67%. Individuals can still use a 50% inclusion rate up to $250,000 capital gain.

A tax advisor can work out the calculations to see if this strategy is beneficial.  

Other Strategies

If your capital gains tax liability is not high, you can use some easy strategies:

• Put the capital gains in tax savings accounts, such as a Registered Retirement Savings Plan (RRSP), and deduct them from your taxable income.
• If you are selling the property near the end of the tax year, consider delaying the sale until January of next year. It will give you more time to accumulate funds to pay the tax.

Contact Glenn Graydon Wright LLP in Oakville to Help You Reduce Capital Gains Tax

Every tax-saving strategy has nuances that need to be planned. An approach that worked for one may not work for the other, depending on their financial and tax situation, their province, and the nature of the transaction. A skilled tax advisor is well versed with the tax laws and can plan your taxes according to your situation. To learn more about how Glenn Graydon Wright LLP can provide you with the best tax planning expertise, contact us a call today at 905-845-6633, or connect with us online.