How to avoid capital gains tax on rental property in Canada? If you’re going to enter the for-profit real estate market in Canada, you’re going to have to account for capital gains tax. If you don’t understand the tax, you could end up with some major cash flow issues or wind up with a large tax bill at the end of the year.
Here is your definitive guide on how capital gains tax works, how you can mitigate it, and what you need to know about paying it.
- 1 What is Capital Gains Tax?
- 2 Does Capital Gains Tax Apply Only to Real Estate?
- 3 How Do You Calculate Capital Gains Tax on the Sale of a Rental Property?
- 4 Do I Have to Report the Sale of My Home to CRA?
- 5 How Can I Reduce Capital Gains Tax in Canada?
- 6 Can I Avoid Capital Gains Tax on the Sale of My Rental Property in Canada: How to Avoid Capital Gains Tax on Rental Property in Canada?
- 7 Can I Move Into My Rental Property to Avoid Capital Gains Tax: How Long Do You Have to Live in a House to Avoid Capital Gains in Canada?
- 8 Is There Anything Else I Should Know About Selling My Rental Property in Canada?
- 9 Need Legal Help from Real Estate Lawyers?
What is Capital Gains Tax?
A capital gains tax is a tax on the amount you make on the sale of an asset. It applies to stocks, bonds, houses, and other assets you might sell.
Here’s a vastly simplified example. You bought the house for $100,000 but sold it for $200,000. You’ve achieved a capital gain of $100,000. The Canadian Revenue Service receives a portion of that $100,000 income. You also receive a tax break when you take a capital loss.
Investors pay tax on 50% of this amount. It’s added to income and then taxed within your regular tax bracket, with any rebates, write-offs, or deductions accounted for. Thus in the example above, you’ve received $100,000 in capital income on the sale of this home.
The highest tax bracket in Canada is 33%, taxable on income over $216,511. So the most you’d pay on that $100,000 is $33,000. The actual tax code is somewhat more complicated than this. Many rental property owners still find this tax to be a bitter pill to swallow.
Does Capital Gains Tax Apply Only to Real Estate?
Capital gains tax is paid on any investment. This could be stocks, bonds, mutual funds, artwork, collectibles, exchange-traded funds, homes you sell, or other investments. You do not have to pay capital gains on Registered Retirement Savings Plans (RRSPs), Registered Retirement Plans (RPPs), or Registered Education Savings Plans (RESPs). These investments are tax-sheltered.
How Do You Calculate Capital Gains Tax on the Sale of a Rental Property?
Since tax law is very complex, it’s easiest to use a calculator. You’ll find an annual capital gains calculator at this link.
Do I Have to Report the Sale of My Home to CRA?
You have to report the sale of any property to the Canada Revenue Agency. If you are selling a principal residence, you do not have to report the sale on your income tax or pay tax on any gain from the sale as long as the property was your principal residence for every year you owned it.
How Can I Reduce Capital Gains Tax in Canada?
One way is to make sure you’re using the adjusted base cost. The adjusted cost base includes the purchase price of the property, the closing costs, and the capital expenditures on the property.
Let’s go back to our earlier example. In the simplified example, you bought the property for $100,000 and sold it for $200,000, thus realizing $100,000 of capital income.
Yet during the time you held the property, you made $25,000 in repairs and improvements. You kept all the records and receipts, so you submitted that amount to the CRA. You also paid $500 in closing costs when you bought the property.
Your adjusted base cost (ABC) is actually $130,000. Thus your true capital gains are only $70,000, not $100,000. Even if you’re in the highest tax bracket, you’re now only potentially paying $23,100 instead of $33,000… significant savings.
If you receive capital losses on other investments, then you can reduce your capital gains taxes. There are various ways to do this that can get quite complex. Seek the help of a tax professional to get help managing your capital gains tax burden.
Can I Avoid Capital Gains Tax on the Sale of My Rental Property in Canada: How to Avoid Capital Gains Tax on Rental Property in Canada?
There is no way to avoid capital gains tax altogether. All you can do is reduce the tax as much as possible.
While you could theoretically try to sell the property for less to avoid realizing a capital gain, you’re not going to come out ahead by doing that. The individual who sells the home they bought for $100,000 for $200,000 gets a $76,900 return even after they pay their capital gains, whereas the person who sells the home they bought for $100,000 for $100,000 doesn’t realize a profit at all.
Paying tax is just part of investment and part of doing business.
Can I Move Into My Rental Property to Avoid Capital Gains Tax: How Long Do You Have to Live in a House to Avoid Capital Gains in Canada?
Not really. You’d have to live in the property for the entire time you owned the property. If you’ve ever rented the property to anyone, then you’d have to pay the capital gains tax. That would be a primary residence, not a rental property.
When you sell your primary home, you’ll fill out both the Schedule 3 and the Form T2091 (IND) form, which designates your property as a principal residence by an individual. You can’t do this if your home is held in trust.
If you rented the home at any point, you will simply fill out Schedule 3, Capital Gains or Losses, and pay the tax.
Farm or fishing property can also be exempt from capital gains taxes if it’s a family farm or fishing operation owned by you or your spouse. This is called the Lifetime Capital Gains Exemption, or the LCGE. It is also cumulative to $883,384. Once you’ve exceeded that amount, you’ll have to pay capital gains tax even on selling the qualifying family farm or fishing properties.
Is There Anything Else I Should Know About Selling My Rental Property in Canada?
If you are selling rental property as a non-resident, you’ll be subject to additional withholding to ensure you pay your tax. See: Buying and Selling Property as a Non-Resident in Canada: The Definitive Guide for more details about this withholding and how it works.
Need Legal Help from Real Estate Lawyers?
We are at the end of our discussion on how to avoid capital gains tax on rental property in Canada. We have answered different queries related to rental property taxes. However, if you face any issues that need legal help, call us at +1-780-488-4152.