Corporate capital gains tax rates in Canada are crucial for every corporate business owner. However, if you have enough knowledge about how it works, it will be a lot easier for you. In this article below, we will discuss everything you need to know about corporate capital gains tax rates in Canada.
Many Canadians own investment properties as individuals. They make money on those properties and are taxed as individuals.
Yet, many choose to form small businesses instead. The businesses own, administer, and manage the properties. The businesses make the income. The businesses pay the taxes on the rental.
Eventually, sometimes the businesses sell the property…and when that happens, the business pays capital gains tax too. Yet, business taxes work a little differently than individual income taxes do.
Here’s what you need to know.
- 1 What is the Corporate Capital Gains Tax Rates in Canada?
- 2 When Does the Corporate Capital Gains Tax Apply to Property Owners? How is Real Estate Investment Income Taxed in Canada?
- 3 How Do You Calculate the Corporate Capital Gains Tax in Canada?
- 4 Can You Avoid the Corporate Capital Gains Tax in Canada?
- 5 How Can a Real Estate Lawyer Help with Your Corporate Capital Gains Tax?
- 6 Get Help from an Experienced Edmonton Real Estate Law Firm
What is the Corporate Capital Gains Tax Rates in Canada?
The capital gains tax is a tax on the profits you make on selling any investment assets, including stocks, bonds, and properties. They can be paid on any investment any time you sell that investment for more than it was bought for.
Corporations pay capital gains tax on 50% of the gain like individuals to do. The income is added to the business’ income to determine the amount of tax owed. The corporation then pays its normal business tax rate.
Some businesses may own properties for their own purposes rather than using them to make income as their primary purpose of doing business. When this happens, they can take some small business deductions to lower the amount of taxes they ultimately pay.
When the principal business of a corporation is to earn income from properties, then they are considered to be a specified investment business. That means they’re not eligible for small business deductions. These are deductions set aside for smaller businesses that have less than $1o million in taxable capital. The small business tax rate is 10.5%.
A corporation’s tax rate is 38.7% but includes a 10.67% refundable tax thanks to the Refundable Dividend Tax on Hand law (RDTOH). RDTOH is a refund that goes to the corporation when they pay dividends to shareholders.
Obviously, corporate taxation is a highly in-depth topic, and getting into every in and out of what your business’ eventual tax would look like after the sale of a property is outside the scope of this article. Needless to say, most businesses will need to work with a qualified tax professional to manage their tax burden.
When Does the Corporate Capital Gains Tax Apply to Property Owners? How is Real Estate Investment Income Taxed in Canada?
If you’ve put your property into the name of a business and that business is actively generating revenue, then you should treat it as a business for taxation purposes. It all boils down to who owns the deed.
Most often, a business will only own properties when it is a farm, a fishery, or when it is some sort of rental business where the primary purpose of the business is to own and rent homes, condos, or apartment units. This may also apply to hotel owners, campground owners, or those who own other, single-family-style short-term rental properties.
Regardless of why you own the property, you do not have to pay the tax until you sell the property.
How Do You Calculate the Corporate Capital Gains Tax in Canada?
You start with the purchase price of the property. Add transaction fees and closing costs, then add the capital costs of any improvements made on the property. This is your Adjusted Base Cost.
Subtract the Adjusted Base Cost from the sale price of the property. The remainder is your capital gain. 50% of that will be added to the business income for the purposes of calculating taxes.
For example, you bought a property at $500,000 in 2000 and sold it for 1 million in 2021. Over the years, you spent $200,000 improving the property. Your ABC is $700,000. That means your business has realized $300,000 in capital gains, $150,000 of which is taxable.
The actual tax you pay on that gain will depend on your other deductions, write-offs, exemptions, and tax scenarios. Your tax professional can help you get more specific numbers on any proposed sale.
Can You Avoid the Corporate Capital Gains Tax in Canada?
No. There is no way to avoid the corporate capital gains tax. By definition, if a home is owned by a corporation and is an investment in that corporation, it is not a primary residence for an owner.
The primary residence exemption is one of the only exemptions that exist for paying capital gains taxes in Canada. The other is the family farm or family fishery exemption, but by definition, these do not apply as a corporation is not a family. There are many benefits to owning property through your business, but tax avoidance isn’t one of them.
The only other way to avoid capital gains tax would be to hold on to the property or wait and sell it at a loss. Most of our clients come out ahead by selling their properties at a profit instead, in spite of capital gains taxes which can look quite hefty at first glance.
How Can a Real Estate Lawyer Help with Your Corporate Capital Gains Tax?
Our real estate lawyers have experience in helping our clients plan for and account for capital gains taxes. We can advise you on tax law and real estate law, ensuring that you don’t make any missteps when planning to sell investment properties.
We also recommend most of our clients consult with a tax professional or accountant before proceeding.
Get Help from an Experienced Edmonton Real Estate Law Firm
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 to property management firms and corporations and can advise on leasing and selling investment properties, real estate litigation, and more. Call (780) 488-4152 to set up an appointment today.