Ever wonder how to deal with your real estate taxes in Canada? If you own a rental property or a real estate investment in Canada, and have sold or are thinking of selling, then it is very important that you read this article because it provides helpful tax tips that can save you $$$ thousands.
Paying Capital Gains Tax – Tax on Real Estate Sales in Canada
When you sell an investment property in Canada you are required to pay capital gains tax on the real estate sale in Canada. ‘Capital Gains Tax’ simply means that only half of the profit (i.e. gain) on the sale of your real estate investment in Canada will be taxable.
For example, if the profit (gain) is $100,000 on a real estate sale in Canada, then only half of the gain ($50,000) would be taxable at your marginal tax rate.
Profit on the Sale of Real Estate Investments in Canada
How do you calculate the profit on real estate sales in Canada?
It is a very simple formula:
Net Sales Proceeds minus the Cost = Profit (Gain).
The Net Sales Proceeds is equal to the selling price less legal fees paid to your lawyer and commissions paid to your Realtor.
The cost is computed as the original purchase price, which should be shown on your purchase and sale agreement when you first bought the property, plus land transfer tax, legal fees paid and the cost of any improvements made to the property.
What are Improvements? – Tax on Property Sales in Canada
When computing year end tax on real estate sales in Canada, you should consider improvements. Improvements increase the cost of your property and therefore reduce the gain and tax on the sale of your real estate investment.
Improvements (also know as capital expenditures) are something that better the quality of the property or extend the life of your real estate investment in Canada. For example, if you replaced the windows on your property, then that is an improvement because it has extended the life of your property. Windows usually last 10 to 20 years.
Another example of an improvement would be replacing your old gas furnace with a high energy efficient furnace. That improves the quality of your property and therefore it is an improvement.
Repairs are not improvements and they would not increase the cost of your property for tax purposes. Repairs include fixing a leaky faucet or repairing a squeaky floor board. Repairs are tax deductible as a current expense on your tax return.
Capital Cost Allowance – Tax on Real Estate Sales in Canada
If you are considering selling a property in Canada, you must factor in depreciation, also known as Capital Cost Allowance. Depreciation represents the wear-and-tear on your property and is tax deductible.
When selling depreciable assets such as real estate in Canada, the Capital Cost Allowance that you claim in the prior taxation years must be included in your taxable income in the year of the sale. This is known as recapture. For example, if you claimed $100,000 of Capital Cost Allowance in prior taxation years, then $100,000 of previously claimed Capital Cost Allowance will be included in your taxable income in the year of sale.
Remember that when selling eligible CCA real estate in Canada, the sale must be reported on your personal tax return, including the capital gain realized and recapture. Since the taxation on the sale of rental properties and real estate investments can be complex, I encourage you to engage the services of a Chartered Accountant in Mississauga / Toronto. If you are in the business of selling properties, you may want to know why you are not entitled to certain deductions. Get ready condo flippers, CRA is hunting you, will tell you why you pay higher taxes when selling property.
About the Author – Allan Madan
Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation . Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.
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