Capital Gains - Useful Background Info
You might have heard the phrase 'capital gains,' but aren't 100 percent sure what it means. We're here to help. A capital gain is where the value of an asset (such as a property) increases compared to what was paid to acquire the asset. Conversely, a capital loss is where the value of an asset decreases compared to what was paid to acquire the asset. For example, if you bought a property for $500,000 three years ago and it's worth $850,000 today, the capital gains is $350,000.
A realized capital gain (or loss) refers to the amount that the asset appreciated (or depreciated) in value at the time it is actually sold. An unrealized capital gain (or loss) refers to the amount that the asset appreciated (or depreciated) in value at a specific point in time, but where the asset has not been sold. In other words, the gain (or loss) ‘on paper’.
In this article, we are going to discuss capital gains as it pertains to real estate in Canada.
Do I have to pay tax related to my capital gain?
In Canada, property owners may have to pay tax relating to a capital gain — or they may not. They don't have to pay this tax if the capital gain relates to their primary residence. They will have to pay the tax, however, if the capital gain relates to a property that was not their primary residence. This includes investment property, rental property, vacation property, and other properties they weren't primarily living in.
Do Capital Gains Count as Income?
There is not a dedicated capital gains tax. Rather, the tax relating to a capital gain works as follows:
The capital gain = (Final sale price minus the costs of selling) minus (purchase price minus the costs of acquisition)
Of this capital gain, 50% of this amount is then added to the owner’s income as a taxable capital gain for the year where their income tax rates then apply.
Other Notes on Capital Gains Exemptions and Divisions
Notes on primary residences:
Owners must have lived at the address for at least one year
Must have truly intended for the address to be the primary residence. In other words, you can’t have lived at an investment property for one year knowing from day one that you planned to sell immediately after one year. If the CRA notes that this is happening — generally if it happens several times — this may trigger an audit or they may not accept that these were primary residences.
Notes on taxable capital gains:
If two people are on the title to a primary residence (most commonly a married couple), the taxable capital gain is divided by 2, and then 50% of that number is added to each person’s income for the year.