Deferring capital gains tax on real estate sales explained

If you have a capital gain on the sale of real estate but have not received the entire payment, you can actually defer paying tax on that capital gain by using the capital gains reserve mechanism.

For anyone who has made a profit on the sale of real estate in Canada this year, this article is of particular importance.  We will reveal a tax loophole that will allow you to delay or defer the tax on the capital gains.  It is also important to distinguish between capital gains and business income, to learn more please read this article on taxes on flipping Canadian real estate – capital gains vs. business income.

When you sell a property in Canada, you are required to report the capital gain realized on your tax return (if you are selling property in the United States, please read this article on the tax implications for Canadians selling US property and real estate).  The capital gain is the difference between the selling price and the original purchase cost.  Selling cost can be deducted from the gain to reduce it.  According to the Canada Revenue Agency’s rules, only half of the capital gain is taxable to you.  What about in cases where you make the sale but do not collect all of the payment from the seller? In this situation, you will still be required to pay the capital gains tax even though you have not collected all of the money.  The solution for a situation in which the buyer makes payments over a period of time is the usage of the capital gains reserve.

Capital Gains Reserve

This reserve allows the seller from exempting all of the capital gains on their income until they receive all of the payment from the buyer.  As long as you are a resident of Canada, you can claim the capital gains reserve.  To claim this reserve, form T2017 in schedule 3 must be completed and submitted with your personal tax return for the year of sale.  Claiming this reserve will allow the deferral of capital gains for a maximum of five years.

For example, let’s assume that you realized a capital gain of $200,000 and the buyer agrees to pay in equal yearly installments over a period of five years.  By using the capital gains reserve, you would only have to report $40,000 of capital gains in income for each year for the next five years.

If you expect your tax bracket to be higher in future years, then claiming the capital gains reserve may not be entirely beneficial.  In this case, you will pay less tax overall if you include the entire capital gain in the current year.

So Here’s the Tip:

When you sell a property for profit.  Claim the capital gains reserve to defer including the gain in your income for up to five years.  For more information on how to minimize tax on real estate sales, please read this article on tax on real estate sales in Canada.

ABOUT THE AUTHOR

ALLAN MADAN

CPA, CA

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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