When you sell a piece of real estate in Canada, you may be subject to capital gains tax, which is a tax on the profit you make from the sale of your property. Capital gains tax is calculated based on the amount of gain you have made, which is the difference between the adjusted cost base (ACB) of the property and the proceeds of disposition.
Determine the Adjusted Cost Base (ACB) of the property
The ACB of a property is the total cost of the property, including the original purchase price, any expenses incurred while acquiring, maintaining, or improving the property, and any costs associated with selling the property. It’s important to keep track of these costs as they can help reduce your capital gains tax liability.
Calculate the proceeds of disposition
The proceeds of disposition is the amount you receive from the sale of your property, minus any selling expenses. Selling expenses may include real estate commissions, legal fees, and other costs incurred in the process of selling the property.
Calculate the capital gain or loss
To calculate the capital gain or loss, subtract the ACB from the proceeds of disposition. If the result is a positive number, you have a capital gain, and if the result is negative, you have a capital loss. Capital losses can be used to offset capital gains in the same year or in future years, so it’s important to keep track of them as well.
Determine the taxable capital gain
If you have a capital gain, you need to calculate the taxable portion of the gain. In Canada, only 50% of the capital gain is subject to tax. To calculate the taxable capital gain, multiply the capital gain by 50%.
Add the taxable capital gain to your income
The taxable capital gain is added to your income for the year, and you pay tax on it at your marginal tax rate. Your marginal tax rate is based on your total income and varies depending on your province or territory of residence.
It’s worth noting that there are certain exemptions and deductions available for the sale of your primary residence that may reduce or eliminate your capital gains tax liability. For example, if the property you are selling is your primary residence, you may be eligible for the principal residence exemption, which allows you to exclude the entire capital gain from your taxable income. However, to qualify for this exemption, you must meet certain conditions, such as having lived in the property as your primary residence for the entire time you owned it.
Capital gains tax is an important consideration when selling real estate in Canada. By keeping track of your ACB and selling expenses, you can minimize your tax liability and take advantage of any available exemptions and deductions. If you’re unsure about how capital gains tax applies to your situation, it’s always best to consult with a tax professional or the Canada Revenue Agency (CRA) for guidance.