The Vancouver property market has seen some incredible growth in the past few years. However, as properties are sold, if they have generated a profit, they also incur a taxable event. Otherwise known as capital gains, this figure is added to your personal income, or claimed by the estate. Understanding how this taxation works, as well as how to reduce, defer and mitigate this figure, could be crucial in deciding whether to purchase or sell real estate in Vancouver.
How Do You Incur Capital Gains in Vancouver?
A common misconception of capital gains is that it is a tax in and of itself. However, there is no ‘capital gains tax.’ In its most simple form, you incur a ‘capital gain’ if/when you have sold your property, for more than you purchased it for. Conversely, if you sold your property for less, you would incur a capital loss and can use that loss to offset other capital gains or carry it forward to offset capital gains in future years.
Of course, this number is not a black and white figure. There are fees and deductions that will affect the gain itself, such as fees and costs associated with buying and selling said property. There are also other mitigating factors that may affect whether you incur a capital gain at all, such as whether the property was your primary residence or additional investment property.
Moreover, capital gains in Vancouver are taxed at the same rate as the rest of Canada. The differences between Vancouver ( and really all of B.C.) and the rest of the country comes down to the provincial and national tax rates, as well as your personal tax bracket. This is because the capital gain itself (or at least the taxable portion of it) is added to your annual income, rather than being a stand-alone payment.
What Is the Capital Gains Rate in 2020?
The rate in 2020 is unchanged and remains at 50% of the capital gain. When it comes to calculating what you owe, the following (simplified) example may help:
- You purchased a property for $500,000 and sold it for $700,000.
- The capital gain portion of the sale is $200,000.
- The rate is 50% of the capital gain, so $100,000.
- This figure -$100,000- is then added to your annual income for tax purposes, rather than generating a separate taxable item.
- The amount you pay depends on the personal tax bracket you fall into, as the $100,000 gain counts as personal income. To calculate your cumulative total for the year, see this link.
Can I Avoid Paying Capital Gains?
The short answer to this question is no. At some point, the tax owing from the capital gain will have to be paid. There are, however, a number of circumstances that may reduce your capital gain, or allow you to defer the payment.
If the property is/was your primary residence, you do not incur a taxable event when it is sold. This is 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.
The numbers aren’t so black and white. The actual figure for the cost of your property is derived from your adjusted cost base. That is, if you purchased your property for $500,000 and then spent $100,000 in permanent improvements, your adjusted cost base is actually $600,000. Then, if you sold for $700,000 your total capital gain is only $100,000 as opposed to $200,000.
Although we are using examples pertaining to the property market, capital gains/losses encompass all assets, not just real estate. This means that if you have made any losses (for example in stocks or bonds), you can use these losses to offset the capital gain made on your property, thereby reducing the income amount added to your overall income. Note: Capital losses can only be offset against other capital gains- it does not reduce your overall income by the loss amount.
As such, you may be able to reduce your capital gains in Vancouver by selling your property in the same year you have made other losses. Similarly, if you have losses from previous years carried forward, these can be applied against the capital gain and may reduce the taxable amount.
If you are in the position to, delaying when you sell your property may also factor into your strategy. For example, selling on or after January 1 puts you into the new financial year, giving you until April 30 the following year to actually make the payment.
Historically in the Vancouver property market, selling in Spring tends to attract higher prices. This may earn you both a capital gain and give you longer to make the repayment. Conversely, if you have made gains on a number of properties or other assets throughout the year, selling one at a loss before the end of the financial year may help you to offset some of them. In doing so you can effectively reduce the total annual gain, and the amount of tax to be paid.
Make voluntary contributions to your registered retirement savings plan (RRSP) to defer (and lower) the tax payable. This allows you to make contributions pre-tax for any given year and allows that contribution to grow tax-free until the time of withdrawal.
Although you can withdraw from your RRSP at any time, if you wait until retirement, that amount will have grown thanks to the power of compounding interest, and you will also only be taxed on it at the marginal tax rate. Presumably the tax bracket you fall into during retirement will be lower than during regular employment, thereby reducing your overall capital gain in the year you make it, as well as the tax payable longer term.
In 2020, the maximum contribution amounts to your RRSP is:
—18% of total income earned/reported on your 2019 tax return
—Up to a maximum value of $27,230.
So on a $100,000 capital gain you could reduce the sum that is added to your taxable income by $27,230. Depending on your other income sources, that figure could make the difference when it comes to assessing your personal tax bracket.
Additionally, the growth of RRSP investments is tax-sheltered. That means that any returns made within your retirement plan are exempt from additional capital gains, income, and dividend tax. It also means that any RRSP investments compound at a pre-tax rate, giving you a bit more bang for your buck.
What if I Inherited a Property?
Death and taxes are a certainty of life, and when it comes to taxes you are considered to have sold all of your assets/possessions one minute before you died. When it comes to inheriting real estate, any capital gain made on the property still creates a taxable event. However, in most instances, it is the estate that must claim/pay the capital gain.
If you are transferring the property to a beneficiary- your child, for example- the property is assessed at fair market value on that day, and any taxable event arising from that transfer or its subsequent sale is based on that amount.
For example, you purchased a property for $100,000 and at the time of your death, it was valued at $500,000, creating a capital gain event of $400,000. With the current 50% rate, $200,000 (or the amount after deductions) would then be added to the annual income of the beneficiary. The rate of tax they incur will depend on their individual circumstances. In addition, if you have more than one child, that $200,000 amount is split between the number of beneficiaries. Four children would result in each adding $50,000 to their personal taxable income.
Moreover, although the property can be transferred to a spouse tax-free, at the time of their passing, the gain will still be incurred and owed by the estate. Of course, planning ahead with your accountant, and making as many claims and deductions as possible can reduce the overall figure, however at some point, it will still need to be paid.
It is also worth mentioning that if the property that was passed down was the principal residence, the capital gains event will not be incurred. However, if you have more than one property at the time of passing, capital gains will need to be paid on each additional property.
At the West Haven Group, we can help you to sell your real estate assets at a time that is beneficial to you. We can also connect you to the right industry professionals, as well as help you to implement beneficial investing strategies. If you would like more information or would like to know whether now is the right time for you to sell your property in Vancouver, reach out and connect!
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