March 08, 2019
How to Calculate Capital Gains Tax
You don’t need a capital gains tax calculator to figure out how much you’ll have to pay if you sell an asset. When you sell an asset for more than you paid for it, you are required to pay capital gains taxes on the profits. How much is capital gains tax? Despite what many people believe, you do not have to pay tax on all of the profits. How to calculate capital gains tax is to take 50% of the profit, add it to your income, and calculate the marginal tax rate for that income (this will vary by province).
For instance, if you sell a property and make $100,000 in profit, the capital gains tax rate will only apply to $50,000. The rate you will be charged for this gain will depend on your income and your tax bracket.
Capital gains tax does not just apply to properties. While the main asset that many people talk about when discussing this tax is real estate, capital gains taxes also apply on the sale of any non-inventory asset, such as stocks or bonds.
CRA Capital Gains Exemptions
The main CRA capital gains exemption applies in situations where you are selling your primary residence. While recent changes mean that you have to list the details of any property you sell on your taxes, you do not have to pay capital gains when you sell your principal residence.
However, the principal residence CRA capital gains exemption can sometimes get complicated.
A principal residence does not have to be where you live all the time. If you, your spouse, or your children live in a property at some point during the year, you can consider that property to be your principal residence. However, you can only designate one property per year as a primary residence. There is no minimum period for how long you or a family member must live in the home for it to qualify. However, the CRA will look at evidence to determine if a property was truly your primary residence.
This means the agency will look at several factors, including how long you owned the property, how often you buy and sell property, and your profession to determine if you actually lived in the property or if you “flipped” the home. For instance, if you are a contractor or builder by trade, the CRA is more likely to assume you purchased the property with the intent of flipping it for profit.
This is important because the capital gains tax rate only applies if the CRA believes you did not buy and sell the property as a part of a business. If the agency believes that you purchased the property with the primary intent of selling it for a profit, it may conclude that you are operating a business. This means you will be taxed on 100% of the profits of the sale, not the 50% capital gains tax rate. Obviously, this is a significant difference.
How Much is Capital Gains Tax and Why This Matters
If you have sold a property and reported it as a primary residence to claim the CRA capital gains exemption, only to find that the CRA rejected this claim, you could be on the hook for a large tax bill. If you sold a property and expected to pay capital gains tax, but the CRA concluded that the profits of the sale should be taxed as business income, you could also be responsible for a large tax bill.
If either of these situations apply to you, then you should contact us today. Our team of professionals can communicate with the CRA on your behalf, help you build a case, and represent you in meetings with the agency. We make sure your rights are protected, your voice is heard, and your tax situation is resolved.