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 – Tax on Real Estate Sales 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 Real Estate Sales in Canada
When calculating the 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 sale.
Improvements (also know as capital expenditures) are something that better the quality of the property or extend the property’s life. 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
When calculating tax on real estate sales 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 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 you sell a real estate property 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.
About the Author – Allan Madan – Accountant Mississauga Oakville
Allan Madan is a Chartered Accountant and a Tax Expert in the Toronto, Oakville and Mississauga regions of Ontario, Canada.
He is also a real estate investor and has first hand experience in working with rental properties and real estate investments.
If you found this article useful, Allan Madan encourages you to visit his website http://madanca.com for additional tax tips and more information on this topic. You can also call Allan Madan at 905-268-0150.
Also, get access to Allan Madan’s Free Report, “20 Tax Secrets on How to Beat the Tax Man,” http://www.siteproweb.com/20-free-tax-secrets-from-allan-madan
Tags: Capital Cost Allowance, Capital Gains Tax, Profit on the Sale of Real Estate Investments, Tax on real estate sale Canada, tax tips
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You explained the situation about capital gains tax on the sale of investment properties in Canada very well. I have another question for you that you didn’t address.
I purchased the investment property (house) 2 years ago for $200,000. I sold it today for $210,000 with the help of a realtor. The realestate fee is $8500 + the lawyer fee of $1000. I improved the value of the property by replacing an outside wall with new siding and insulation for $600. I think this all adds up to more than what I got for the sale of the house. I think I am in the hole so does the government (taxman) pay me money? Can I claim my loss? If not, this isn’t fair.
Rob at … theoldfoxx@rogers.com
Hi Robert,
Thanks for your inquiry!
Your initial adjusted cost base of your property was $200,000 and later increased by $600 because of the insulation improvements. As such for the purposes of the property dispositions, your new ACB is $200,600. Now, in terms of your disposition proceeds, it will be your initial selling price of $210,000 less any outlays and expenses, in your case the real estate and lawyer fees ($8,500 + $1,000 = $9,500).
The bottom line is that you will have a capital loss of $100. The government will not be paying you this amount. What will happen is that this capital loss will be applied to your net capital gains for the year (if you have any). If you don’t, you can carry it back 3 years and apply it to any previous capital gains then or carry it forward for an indefinite period of time. Your capital loss carryforward amount will also be stated on your Notice of Assessment from the CRA once you file your tax return for that year.
Hello,
We purchased a pre-construction 1 bdrm condo 2 years ago, but recently bought a 2 bdrm condo because we needed more space. The 1 bdrm condo is near completion and will be closing in a few months. But I am required to pay an occupancy fee until the closing date. If we decide to sell the condo instead of renting it, can I claim this occupancy fee as part of the costs to be deducted from the net sales to calculate the net profit?
Thanks!
I Googled “capital gains on commercial property sale” and yours was the most informative and in layman language. Still unclear about a few things but I will re-read it several times and ask our accountant, thanks for the help.
Thank you for your comment.
If you need any additional assistance, please do not hesitate to contact me.
Hi May,
The occupancy fee can be added to the cost of your condo unit when you sell the property.
Thanks,
Allan
I am a joint owner of a small condo with my mother. The condo is my residence home in Singapore. I am now married to a Canadian and have now moved to Canada (Montreal) for about 2 years. Recently, we sold the condo and I will get the proceeds of about S$300,000. Out of this amount, $100,000 will be returned to Government Central Provident Fund (money borrowed from CPF for purchase of the condo). Thus, the net cash gain is S$200,000. Do I need to pay Capital Gain Tax on this amount as this property was bought and sold in Singapore.
If I keep this money in a joint account with my mother in Singapore, do I need to pay capital tax on it.
Although I am joint owner of the property but my mother paid 2/3 of it. Therefore, we have agreed that she will take a higher portion of the sale proceeds. So for capital gain, how do I declare the amount received?
Thank you
Dear Sherlynn,
The gain you will have to realize in Canada is as follows: 1/3 of ($300,000 – value of the property on the date of entry to Canada). This amount will have to be included in your Canadian tax return.
If you have any more questions, please do not hesitate to contact me.
- Allan
Hello,
Your site is very informative THANK YOU! Can the 50% capital gain on the sale of a property be split between spouses? Ex. We have a capital gain of 200,000$; 100,000$ is taxable; we each claim 50,000$
Hi Dianne,
You can split between spouses if you two are the joint owners of the property as per the purchase/legal documents.
Usually, the gain is split between spouses based on the % of their contribution when they purchase the property. For example, if you paid $150,000 and your spouse paid $50,000 for a $200,000 property initially, then you would recognize 3/4 of the gain and your spouse, 1/4 of the gain when you sell the property.
Thank you,
- Allan and his team
Hello!
i had a question here … i am wanting to sell the house im in , its really owned by my Mother and father since the title is in there names , and it was given to them many many years ago when my grandmother died.
Ive been living in the house myself for 5 to 6 years now and was wanting to move out of Toronto and live up north.
the House was bought 30 years ago or so for $125K … the selling price today would be around $450K … would my parents have to pay the capital gains on the house if i sold it? or is there a way to get around it?
thx so much.
Hi Cliff,
It depends on several factors.
If during the period of time that the house was owned by your mother and father, your parents lived in the house at any time during the year (let’s say, they lived in the house every summer), then they can deem the house as their principal residence and pay $0 in taxes when the house is sold.
However, they must have not claimed any other residence as their principal residence and sold it during the period mentioned above.
- Allan and his team
Hi.
I have a question and hoping it can be answered by you.
I bought a house but it is under my parents names because I had no income at the time but the down and all other expenses were paid by me. My husband and I live in this house while my parents live at their own house. Now I want to sell it. We bought is for $205k and we are selling it for $335k. Capital gain would then be $130k or $65k? We did change the furnance and roof and renovated worth $30k, can we deduct these expenses and can I also deduct the lawyers and agent commission?
Please help and thank you.
Hi Angela,
Although you paid all the expenses, since the house is under your parents’ name, the gain will be included on your parents’ tax return. However, your parents may be able to offset a portion of the capital gain using the principal residence exemption.
The roof and furnace renovation will help reduce the capital gain and the expenses such as legal, commission, and land transfer tax will also be able to reduce the capital gain.
Thank you,
- Allan and his team
Hi,
This is some great info, thank you! 2 additional questions:
1.) Is the borrowing cost (interest on mortgage or line of credit pertaining to investment property) deductible for capital gains?
2.) In relation to May’s question (posted on Jan 24th) about occupancy fee.
i.) If one does decide to rent out the property (during occupancy prior to closing), would it make more sense to offset your rental income by the occupancy fee, as rental income is 100% taxable?
ii.) Post closing: Are condo fees and utility charges deductible from capital gains if the condo was NOT rented out?
I have a recreational Property in Alberta that I have held about 13 years. I now wish to sell it but obviously would like to reduce the amount of capital gains I pay. Are the property tax or utilities deductible?
Thanks Kevin
Hi Kevin,
Property taxes or utilities are not deductible from your capital gains.
However, you will be able to reduce your capital gains by the following:
- Any significant improvements made to the property (ie. added patio)
- Land transfer tax
- Legal cost incurred at time of purchase and sale
- Commission fee
- other
Furthermore, you may benefit from claiming principal residence exemption on the property.
If you need further assistance, please do not hesitate to contact us.
- Allan and his team
Hi Daniel,
Thank you for your question.
1) No it is not. However, if you plan on renting out the property, then the interest can be used to offset your rent income
2) You can reduce your capital gains by the occupancy fee
3) You would not be able to claim full amount of occupancy fee as rental expense. Rather, the cost would be added to the cost of the property and you’ll be able to claim 4% depreciation expense on the building to offset your rental income.
4) No but you can claim it as rental expense.
Thank you!
- Allan and his team
Hi, found your article to be very informative.
For my situation, my mom and I bought a condo back in 2005 for 170k. I lived there alone for 3 years. Once I got married, my wife and I purchased a townhouse and rented out the condo. Fast forward to 2012, we sold the condo for 240k (less realtor and lawyers fees). I have the following questions:
1) Since the condo was my principal residence between 2005-2008, can I base my capital gains on the value of the property starting 2008 instead of 2005?
2) If yr 2008 is is allowed above, what can I use as the basis for property valuation i.e. MPAC statement or realtor sales values or other?
Thanks in advance.
Hi Roger,
1) Yes. Also, don’t forget about the +1 rule. You can read more about it at: http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/rprtng-ncm/lns101-170/127/rsdnc/menu-eng.html
2) Realtor’s estimate and comparables would work. However, when you converted the condo to a rental property in 2008, your accountant should have obtained this information from you to report on the rental statement in the tax return.
Thank you,
- Allan and his team
Hi,
I just bought my 2nd home for $500,000.00 and we are putting in $40,000.00 dollars into renovations. We are hoping to sell it this year for $630,000.00. I just paid $8500.00 to land transfer tax and lawyer fees on top of all the renos. At the end of all this how much will I be taxed. I was told by another source that we have a certain exemption per year per lifetime….is that only if you have a business or shares????
Thanking you in advance.
Hello Allan and the team!
I have a question regarding a sale of rental property: for capital gain calculation, can i add CMHC insurance to adjusted cost base and can i include mortgage penalties and fees (for breaking the mortgage agreement) to outlays and expenses?
Thank you very much
Hi Rose,
Each individual (if single) can designate one property as a principal residence. You are allowed to designate only one property as principal residence per tax year. So only one of your 2 properties can be designated as principal residence during any year of ownership. If you are going to sell your 2nd home and hold on to your first home, we suggest that you designate your 2nd home as principal residence for every year since your purchased the property. This will allow you to be exempt from any capital gains on the property due to asset appreciation. This is not a lifetime exemption but your 1st home will not be allowed to be designated as principal residence for the years that your 2nd home was designated as principal residence. This means that you will likely incur some capital gains on the sale of your first property.
- Allan and his team.
Hi Sam,
CMHC insurance is added to adjusted cost base on disposition of rental property.
Yes, you can include mortgage discharge fees and mortgage prepayment penalty as part of your selling costs.
- Allan and his team.