In the first part of our capital gains series- Capital Gains in Vancouver- How to Reduce Your Taxable Income– we looked at what capital gains are, how they’re incurred and potential ways to mitigate or minimise the tax payable when you sell your property in Vancouver. Once you have determined whether you have incurred a taxable capital gain, it’s important to understand the process of how to actually report it to the Canada Revenue Agency.
When Do You Report a Capital Gain or Loss?
Reporting a capital gain or loss is required when you have disposed of a capital asset. For ease of understanding, we will refer to property (real estate) as that asset from here on in. You are required to report this gain in the same calendar year that you sell the property (January to December).
It’s also important to note that regardless of whether you made a gain or loss, or whether you are required to pay tax on that gain (for example, if it was not your primary residence), you must still report the sale on your income tax return.
If the property was your primary residence you will not be subject to tax on the capital gain. However, if it was a second property, 50% of the gain you make from the sale of the property is considered taxable income.
As a reminder, there is no stand-alone ‘capital gains tax.’ Rather, this figure needs to be added to your personal income for that calendar year, and you will be taxed on your overall income (including this figure), based upon your marginal tax rate for that calendar year.
How to Calculate Your Capital Gain
When it comes to calculating your capital gain on real estate, you first need to determine your adjusted cost base. This is the overall cost of the property, not just the original price you purchased it for. We strongly recommend the use of an accountant or financial professional in this step, but for the sake of example let’s say:
You paid $500,000 for your property
Plus an additional $25,000 in fees to acquire and sell it.
And whilst living there, spent $125,000 on renovations/permanent improvements
Your adjusted cost base would be equal to $650,000.
If you then sold the property for $750,000 your capital gain is actually $100,000, as opposed to $250,000 (based on the original purchase price alone).
Of this $100,000 only 50% is taxable. Although you need to report the transaction itself, only $50,000 would be added to your annual income for that calendar year, and you will be taxed depending on the marginal tax rate that applies to you.
How Do I Report Capital Gains Tax in British Columbia?
In B.C., capital gains or losses are reported on a Schedule 3 form. It is a self-reporting system, and once you have calculated your adjusted cost base and other expenses is really just a simple form to record the numbers. Of course, you are also required to have evidence to substantiate these figures. The submitted form must include:
The year of acquisition (the year you purchased the property in B.C.)
The proceeds of acquisition (the sale price)
The adjusted cost base
Any fees or costs associated with the sale of the property
The overall capital gain (or loss) resulting from the sale of your property
If you’re looking for ways to defer or minimize your capital gains, or aren’t sure if you’ve incurred a capital gain, please reach out and connect with our team. As some of the top-performing Realtor’s in Vancouver, our team is ‘on the ground’ and always adapting to the current state of the market, in order to assist our clients to acquire and profit from their property investments.