If you are planning to sell a property, or even purchasing a property that you plan to sell in the future, it is essential to consider the impact of capital gains tax on real estate. This tax applies to profit made from the sale of a property, whether it is a residential, recreational, or investment property.
What is the Capital Gains Tax?
The capital gains tax applies to the increase in the value of an investment, such as real estate or stocks and shares. In other words, if you purchase a property and later sell it for a higher amount, you will be required to pay tax on the “capital gains” (or the profit you made on the sale of the property from the original purchase price). Capital gains can be calculated by subtracting the sale price from the purchase price.
Calculating Capital Gains on Real Estate
As of June 25, 2024, individuals who sell property will be taxed 50% on their capital gains up to $250,000. Beyond $250,000, individuals who sell property are taxed 66.67% on any additional capital gains. As a result, you will pay additional income tax, at your marginal rate, commensurate to the amount of capital gains.
Corporations and trusts are also subject to capital gains tax. However, regardless of the amount of capital gains, corporations and trusts will be taxed 66.67% on capital gains.
When Does Capital Gains Tax Apply to Real Estate?
Capital gains tax applies to many types of real estate, with one primary exemption: principal residences. According to the Canada Revenue Agency (CRA), a property is exempt from capital gains tax if the property is owned alone or jointly, the taxpayer and their current or former spouse or common-law partner, or any children, lived in it at some time during the year, and the taxpayer designates the property as their principal residence. However, only one property can be designated as a principal residence per family unit per year.
Who Pays Capital Gains on Joint Property in Canada?
Determining who pays capital gains tax on joint property in Canada can be challenging. When more than one person owns property, the method of ownership determines how capital gains will be attributed.
Joint tenancy is a method of ownership wherein each owner has an equal share of the property, subject to the right of survivorship. If one of the owners passes away, their share of the property automatically transfers to the surviving owner. So, if joint owners sell a property before one of the owners passes away, the capital gains will be split equally between the owners. However, if one owner passes away before the property is sold, the surviving owner will be responsible for the capital gains.
Tenancy in common is another method of joint ownership wherein owners have a specified share of the property (which can be equal or unequal). In these instances, if the owners sell the property, capital gains are divided according to each owner’s share of the property. So, for example, if one owner has a 70% share of the property and the other owner has a 30% share of the property, the capital gains tax liability will be split 70/30 between the owners.
Who Pays Capital Gains on a Deceased’s Property?
When a person passes away, a final tax return will need to be prepared on their behalf. In this process, property owned by the deceased will be subject to capital gains tax and treated as though it has been sold at the time of death (using fair market value). Any resulting capital gains are added to the deceased person’s “income” at this time and the estate will be taxed on any arising capital gains.
Minimizing Capital Gains on Real Estate
While it is not possible to avoid capital gains tax entirely in many cases, there are strategies you can use to help minimize the capital gains tax you will have to pay on real estate sales. In any event, it is important to speak with an experienced real estate lawyer and/or accountant to determine what options are available for your particular situation.
Capital Losses
Capital losses are the inverse of capital gains: in other words, capital losses occur when you sell investments (like stocks) for less than what you paid for them. If you have capital losses on other investments, you can use those losses to offset capital gains from your real estate sale.
Adjusted Cost Base (ACB) Adjustments
The adjusted cost base (ACB) refers to the price that you paid to acquire an investment, and can include the cost of realtor and legal fees along with (some) improvements and repairs to the property.
Strategic Timing When Selling Property
In some cases, it may be worth strategically timing the year in which you sell a property, as your capital gains are taxed according to your marginal tax rate. For example, if your income is lower (or you expect it will be lower) during a particular year, it may be wise to sell during one of those years to reduce your marginal tax rate and face a lower tax bill.
Use RRSPs and TFSAs to Your Advantage
Contributing the profits of a property sale—or making a significant contribution—to an RRSP or TFSA allows you to reduce your taxable income and offset your capital gains. However, you will need to be mindful of your contribution limits and remember that you may be taxed on withdrawals from these accounts.
Contact Bader Law for Representation in Residential Real Estate Transactions in Ontario
Whether you are buying your first home or selling an investment property, Bader Law’s residential real estate lawyers are here to help. We represent clients across Ontario in a variety of commercial and residential property purchases and sales. We will ensure nothing is overlooked leading up to the closing of your transaction and will help you ensure that any issues are resolved in an efficient manner. To speak with a member of our team about your real estate transaction, call us at 289-652-9092 or contact us online today.