Owning real estate presents an extraordinary opportunity to nurture your personal wealth. When the time comes to sell your home, you are able to cash in on years of equity growth and appreciation. However, there will be financial implications.
In some instances, sellers will face taxation upon the sale of their property – including capital gains tax.
Continue reading to learn more about capital gains tax, who must pay it, and how to protect your returns when selling a home.
Selling your home? Our strategic advisory services can help you achieve a smooth and lucrative sale. Call us at 416-722-4723 or reach us by email at evan@christensengroup.ca.
Who Pays Capital Gains Tax in Canada?
In Canada, there are various expenses associated with selling real estate. Some of these are transactional, while others come in the form of taxation.
One of the most significant taxes that can apply to a home sale is capital gains tax. Although this tax only impacts a fraction of sellers, it’s important to confirm whether or not it will apply to you.
Here’s what homeowners should know first: Capital gains tax primarily applies to investment and secondary properties. Examples of this include a flipped home, long term rental, or a vacation house. For most everyday homeowners, it doesn’t apply – although there are exceptions.
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What is Capital Gains Tax?
The concept of capital gains tax is relatively straightforward. When a qualifying property is sold, sellers face taxation on 50% of the appreciation.
Consider this example: Assume you bought a house for $500,000 and later sold it for $1,000,000. The capital gains tax would be levied on 50% of the $500,000 profit. This means you would need to report $250,000 of capital gains on your tax return.
Do I Have to Pay Capital Gains Tax When I Sell My House?
There is a principal residence exemption in Canada, meaning if you sell your primary residence (the property where you live full time) you are exempt from paying capital gains tax.
The requirements for a home to be considered a principal residence are outlined by the Canadian Revenue Agency (CRA) as follows:
- It is a housing unit, a leasehold interest in a housing unit, or a share of the capital stock of a co-operative housing corporation you acquire only to get the right to inhabit a housing unit owned by that corporation
- The seller owned the property alone or jointly with another person
- The seller, their current or former spouse or common-law partner, or any of their children lived in it at some time during the year
- They have designated the property as their principal residence
A home must meet all four of these characteristics in order to qualify as a principal residence.
Understanding Principal Residence Exemption
There is one remarkable tax benefit that can significantly help Canadians facing capital gains tax, known as the Principal Residence Exemption.
Canadians who own multiple properties are typically able to select which one they would like to designate as their principal residence. While basic requirements still apply, the threshold for qualification is relatively low. This can lead to impressive savings come tax season.
Capital Gains Tax on Inherited Properties
In most cases, gains from the sale of a principal residence are not subject to tax. However, there are certain exceptions. Primarily, if the house is not being sold by the original purchaser.
One common example of this is the sale of inherited property – such as selling a family member’s home after they’ve passed away. Although the home may not have been used to earn income, the CRA considers it an asset rather than a primary residence once the original homeowner is no longer living there full time. Therefore, capital gains tax will apply when the inheritor sells the home.
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Understanding Deemed Disposition
Another instance in which a principal residence could face capital gains taxation is deemed disposition, which occurs when the homeowner changes the use of their primary residence.
For instance, maybe you lived in your condo for five years before moving out and using it as an income-generating rental property. In the eyes of the CRA, your home no longer qualifies as a principal residence even though it once was.
For taxation purposes, the home is treated as having been sold at its fair market value and subsequently repurchased as an investment asset. Then, the property’s market value at the time of deemed disposition becomes the adjusted cost base, which is then employed in the calculation of capital gains upon the property’s sale or reconversion to a principal residence.
Selling your home or investment property? We can help. Call us at 416-722-4723 or reach us by email at evan@christensengroup.ca.
