Are you one of the thousands of Canadians who own a second property? You’ll have to pay capital gains tax on second property in Canada when it’s time to sell the property.
Capital gains tax applies any time you sell an investment asset for more than you bought it for. You might have used your second property for summer vacations or to be close to a job in another city, but it still counts as an investment asset when it’s time to sell.
Little wonder: hold on to a property for 10 years in Canada, and you’re likely to see the value of that property go up by 81%. Gather significant equity in that property, and you stand to see your wealth grow significantly when it comes time to sell. Rest assured, the capital gains tax is unlikely to prevent you from attaining a significant windfall if you hold on to that property long enough.
- 1 What is the Capital Gains Tax on Second Property in Canada?
- 2 Does the Mortgage Amount Matter to Capital Gains?
- 3 How Do You Avoid Paying Capital Gains Tax on a Separate Property in Canada?
- 4 Can You Have Two Primary Residences in Canada?
- 5 Can Spouses Have Separate Primary Residences in Canada?
- 6 How Can a Real Estate Lawyer Help You Solve Your Capital Gains Tax Issues?
What is the Capital Gains Tax on Second Property in Canada?
The capital gains tax on a second property is the same for any property that is not your primary residence.
You take the adjusted base cost of the home and subtract it from the selling price. The result is your capital gain.
The adjusted base cost is the price you bought the home for, plus the closing costs, plus the value of any capital improvements. Note that regular maintenance for wear and tear doesn’t count, but significant improvements to the property might. Replacing a 20-year-old asphalt roof with another asphalt roof isn’t an improvement. Replacing it with a new metal roof might be.
If you made $50,000 of improvements on a $200,000 home, your adjusted base cost is $250,000. If you sell that home for $362,000, then you’ve realized a capital gain of $112,000.
50% of that is counted as taxable income, which means that $56,000 will be treated as income when you file your taxes at the end of the year. That will be added to other income you’ve received, such as income from your job, rental properties, or any other source. The percentage you will tax will depend on your tax bracket. The highest tax bracket is 33%.
Does the Mortgage Amount Matter to Capital Gains?
No. Even if you have to use some of the proceeds from the sale to pay off your mortgage, you still have to pay some taxes if you realize some sort of capital gain.
In the previous example, you could still have an outstanding mortgage of $132,000 on your property. The proceeds would pay off that mortgage first, but you’d still get a check for $230,000 to put in your own account. And only $56,000 of that is even taxable income. You still come out ahead.
How Do You Avoid Paying Capital Gains Tax on a Separate Property in Canada?
You don’t. There is no legal way to avoid paying capital gains tax.
There are some exemptions to the capital gains tax. One exemption is if you are selling a family farm or fishery. That won’t apply to most people’s second properties.
The second is if the home is a primary residence.
Can You Have Two Primary Residences in Canada?
If you spent a significant amount of time living in your second home and never once used it as a rental property, then you may be able to lower your capital gains taxes by claiming it as a primary residence.
Note that you can sometimes use these properties as Airbnb for short periods of time and still claim primary residence status, but only if you’re doing it for short periods of time when you’re not occupying the premises. It has to mostly be used as your own residence before the exemption can apply.
You can only claim one home as your primary residence at a time each year, so you will want to consult with a tax professional before doing this. Eventually, you might want to sell your primary home too, and if you’ve claimed primary residence status for your second home, you’ll face a capital gains tax on that sale as well.
If it makes sense to you to claim both homes, then you can use this formula to determine how big of a tax break you’ll get on the capital gain:
(# of years home is principal residence + 1) x capital gain
# of years home is owned
It is not always going to be worth it to create these sorts of complications. On the other hand, it might be worth it to evaluate which home is gaining value the fastest and which is more likely to be sold first and strategically declare your primary residence based upon this information.
Can Spouses Have Separate Primary Residences in Canada?
The CRA only lets you designate a different residence for the husband and wife for years before 1982. The CRA primary residence exemption allows one home to be claimed per family, which means no, you can’t claim a separate primary residence even if you and your spouse are legally separated.
How Can a Real Estate Lawyer Help You Solve Your Capital Gains Tax Issues?
We hope you have understood the capital gains tax on second property in Canada. However, are you in trouble with the CRA? Your real estate lawyer might be able to help you work out a compromise.
Are you struggling to understand the best way to handle tax planning on your properties? Your real estate lawyer can help. Not sure what the implications of transforming your property into a rental might be? Ask us!
Our legal team has decades of real estate experience. Make sure your interests are protected. Our team is well-prepared to offer a great deal of support for every real estate issue you might encounter.
Call (780) 488-4152 to set up an appointment today.