In Canada, buying and selling assets- at a profit- is considered a form of additional income. This profit is referred to as capital gains, and, as with any form of income, it can also incur additional tax. Although capital gains are not a tax in and of themselves, they do count as income in most circumstances. Whilst you may incur capital gains on a wide variety of tangible and intangible assets, today we’re looking specifically at real estate, to determine if your capital gain will count as income.
I Just Sold My Property- Does That Trigger a Capital Gain?
A capital gain is triggered when the value of an asset increases compared to what was paid to acquire it. This is also known as a ‘realised’ capital gain, and when it comes to physical property like your house, the rules are no different.
Regardless of when the property was purchased, if it is sold for more than the original purchase amount- it triggers a capital gain.
The good news is that only a portion of that capital gain is considered income. Regardless of where in Canada you live, that portion is 50% of the capital gain (after deducting expenses). The confusion surrounding capital gains is usually surrounding how it is taxed, and how it actually affects your income.
So to simplify it- the actual tax you pay depends upon your other sources of income in the same calendar year that you sell your property. Your total income determines your personal tax rate, and in circumstances where the capital gains count as income, the dollar amount is added to your personal income. It is not taxed separately.
There are, however, a few situations where your capital gain will not be considered income.
How Do I Know If My Capital Gains Count as Income?
There are two primary test cases to determine if your capital gain will be counted as income.
- Was the property your primary residence, or designated as such? If yes, the capital gain will not be counted as income, and will, therefore, not affect your taxable income.This is particularly important for people with more than one property, as it may be beneficial to declare the more highly valued property (or whichever property has/stands to make the largest capital gain) as the primary residence.
- Did you purchase the property using your Registered Retirement Savings Plan (RRSP) or similar initiative? Any investments made under these schemes are tax-sheltered and the capital gain will not count as income.You will still pay tax on it eventually, but in most circumstances, it will not be until retirement, and then it will be at the marginal tax rate. It also means that any RRSP investments compound at a pre-tax rate, giving your investments (and retirement savings) a boost in the long term.
There are some mitigating factors which may also change the nature of your capital gain, such as whether you inherited the property. For example, if the property that is passed down was a principal residence, it will not trigger a capital gains event, and therefore not be counted as additional income.
On the other hand, if more than one property is passed down, the capital gain (assessed based on the fair market rate at the time of inheritance) will be considered income on each additional property. For strategies to minimise your capital gains, how much is counted as income, or the amount of tax you’ll pay on said gains, please see Capital Gains in Vancouver- How to Reduce Your Taxable Income.
For any other property-related inquiries, reach out and connect with us!
Our professional and dedicated team can help you to implement strategies to reduce your taxable income from capital gains, and learn the most effective ways to re-invest that capital!