September 06, 2018
In Canada, CRA capital gains tax is charged whenever you sell an asset for a profit. It is Important to know what is capital gains and what is business income to determine if you will be taxed. Find out how to calculate capital gains tax, how much is capital gains tax, and more
What You Need to Know About Capital Gains Tax in Canada
A capital gain (or loss) is the gain (or loss) resulting from the sale of a capital asset or property. According the Canada Revenue Agency (CRA) a capital property is “depreciable property, and any property which, if sold, would result in a capital gain or a capital loss.” In general capital property is nearly anything that you could buy and sell as an investment or to earn income, not just physical properties.
However, the assets of a business (such as business inventory) are not considered capital property.
Some examples of capital property include:
- Cottages and residences other than your primary residence
- Stocks, bonds, or units of a mutual fund trust
- Equipment, land, and buildings used in a business
If you sell these assets and investments for more than you paid for them, you are required to pay CRA capital gains taxes.
What Counts as Capital Gains in Canada
While capital gains are paid on “capital property,” this does not mean that you only pay capital gains tax Canada on physical property. You will be required to pay tax on the sale of any capital asset, including money made from the sale or stocks or bonds.
The sale of your primary residence is not subject to CRA capital gains taxes. However, you are required to report the sale of any residence on your income taxes, even your primary residence. If a property was your primary residence for the entire time you owned it, you can claim the full primary residence deduction. If the property was not your primary residence the entire time, then you may have to report all or some of the profits of the sale as a capital gain.
Capital Gains Taxes & Your Primary Residence
However, since real estate in many areas of the country has increased in value quite a lot over the last few years, some people may try to claim a property as their primary residence while they renovate the home and then sell it for a profit. They may then try to claim another property as a primary residence to avoid capital gains taxes.
Note that you are only able to designate one property as your primary residence at a time, and that you or your family must have “ordinarily inhabited” the property for it to be exempt of capital gains tax Canada.
The CRA does not list a specific time that you have to live in a home for it to be “ordinarily inhabited,” but it does take several factors into account when determining if a property should rightfully be considered your primary residence. These factors include your intent at the time of purchase, how long it has been between the purchase and sale of the property, how many purchases and sales you have made, how many primary residence designations you have made, and other details.
How Much are CRA Capital Gains Taxes?
When you sell a capital property for more than you paid for it, this is called a capital gain. You must pay taxes on 50% of this gain at your marginal tax rate. For instance, if you buy a property as an investment and then sell this property, making $100,000 in profit, you will be required to pay tax on $50,000.
CRA Capital Gains Exemption Information
There are some situations where you do not have to pay CRA capital gains. One of these cases is the sale of a primary residence. A primary residence can be any residential property that is occupied by you or your family at any point during a given year.
A few years ago, the law was changed so that you need to report the sale of any residential property on your tax return, even if the property is your primary residence.
This is because the CRA wants to track all real estate purchases to ensure that primary residence claims are valid. For instance, if a person purchases a home, claims it as their primary residence, and then sells the home six months later, the CRA may conclude that this person “flipped” the property and reject the primary residence claim. Whether the agency chooses to do this will depend on several factors, but in such a case, the CRA capital gains exemption would not apply and the profits from the sale would be taxed.
You are only able to claim one primary residence at a time. There is no limit to how often you can change your primary residence, and no minimum time that you must live in a property for the exemption to apply. However, since you now have to report all property sales, the CRA can use the information you provide to investigate whether you actually lived in the property or if you are trying to avoid paying capital gains tax Canada real estate by claiming it to be your main residence.
The Lifetime CRA Capital Gains Exemption
Many years ago, there was a $500,000 lifetime capital gains exemption that applied to any asset. It was introduced in 1985. This amount was reduced to $100,000 in 1988 and eliminated completely for most assets in 1994. However, that same year, an enhanced lifetime capital gains exemption limit was introduced. It applied only to qualified small business corporation (QSBC) shares and qualified farm properties. Later, qualified fishing properties became eligible. The exemption is indexed to inflation.
To claim this exemption, you, your relative, or member of your partnership must have owned the asset for at least 24 months prior to its sale and you must have been a resident of Canada when the asset was sold.
Capital Gains Tax Canada or Business Income?
In some cases, the CRA considers the sale of an asset to be business income rather than CRA capital gains. This is an important distinction because while the capital gains tax rate applies to only 50% of the profit of a sale, business income is 100% taxable. As you can imagine, this can be a very big difference in your tax bill.
So how does the CRA differentiate between capital gains and business income? That depends on several factors.
As mentioned earlier, the CRA now requires that individuals report the sale of any residential property, even those that are considered their principal residence. This is because, in some circumstances, the CRA can consider the sale of a residence to be business income.
For example, if you owned a property, rented it out, and then sold the property, the CRA will likely consider the profits of the sale to be a capital gain. This is because you generated money from the asset by renting it and then sold it later.
However, if you purchased a property, renovated it, and then sold it for a profit, the CRA may consider this to be a business activity. This is especially true if you have purchased and sold several properties recently, or if you are a builder or contractor by profession. In these cases, the CRA will assume that you are in the business of buying and selling homes and then consider the profits of the sale to be business income.
How to Legally Reduce or Avoid Capital Gains Tax Canada
In addition to claiming a property as a primary residence, there are other ways to potentially reduce the CRA capital gains you are expected to pay.
For instance, capital gains can be offset by capital losses from other investments. In addition, donating securities to a registered charity or private foundation will not result in CRA capital gains. Finally, if you sell an asset and do not receive the money from the sale right away, then you may be able to defer the capital gain until later.
Many people worry about how to calculate capital gains tax or how much is capital gains tax. This makes sense as these taxes can be quite costly. If you are concerned about how you will be taxed for selling an asset, then you may wish to speak with a professional about your situation. If you are having trouble with the CRA regarding capital gains tax Canada real estate, if the CRA has rejected your principal residence claim, or if the agency believes the profit from a sale is actually business income, you will want to contact us right away. Having a professional on your side can make a significant difference and help you prove your case to the CRA.