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When is capital gains tax payable on the sale of property? And at what rate are capital gains taxed? We answer these questions and more.
Capital gains. Even the mention of these two words together can immediately conjure myths about owing the government 50% of the money earned from selling a home. But, like most rumours, it’s only half true—for now. You may have also heard that Budget 2024, the Canadian federal government introduced an increase on certain capital gains. That’s 100% true.
For individuals with a capital gain of more than $250,000, they will be taxed on 66.67% of the gain as income—up from the current 50% rate, according to Budget 2024. This inclusion rate change comes into effect on June 25, 2024. Every week, our inbox is full of letters from readers asking how to avoid the capital gains tax. They want to know how to work the system and keep more money in their pockets. Listen, it’s valid to want to hold on to the money earned off of the sale of a secondary residence (cottage, second home) and an investment property (rental or commercial property).
According to RE/MAX Canada’s Cottage Trends in Canada in 2024 report, the average price of a cottage in Canada is expected to rise this year by 6.8% from 2023—which is not small change. So, the idea that you’re forking over half your money simply isn’t true. The need to dispel this rumour is what inspired this guide to capital gains on the sale of property, which will answer the most common questions with our most popular articles on the topic.
And while we cannot show you how to avoid taxes (it’s one of two things you can’t avoid in life—death is the other), I can share insights on how to use any Canada Revenue Agency (CRA) rules in your favour.
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According to the MoneySense Glossary, “a capital gain is the increase in value on any asset or security since the time it was purchased, and it is ‘realized’ when the asset or security is sold.” In the case of this article, the asset we are dealing with is property, which could be a cottage, second home, investment or rental property, as stated above.
Our definition of capital gains begs the question: “Can you have a capital loss?” Yes, you can. A capital loss occurs when you sell a property for less money than you originally purchased it for. In some cases, you might be able to use a capital loss to reduce your income for your tax return, if you are reporting capital gains in the same year.
Speaking of tax, a capital gains tax is the money owed in taxes from the income earned. It’s not a specific tax, per se…. But more on that below.
For more on the ins and outs of how capital gains works, read: Capital gains explained.
Before we dive into the tax part, let’s go through how to calculate capital gains on the sale of a property. Essentially, this calculation figures out how much the property’s value grew from when you first bought it to the day you sold it. This above is a simple-math calculation of the capital gain.
Capital gain = purchase price – selling price
We will dive even deeper to reduce the amount of capital gains you would claim on your tax return (more on that below).
So, it’s not that capital gains are taxed at a rate of 50%, but it’s that 50% of the capital gains are taxable. At least until June 25, 2024, when that rate changes to 66.7% for gains more than $250,000. And the capital gains tax rate depends on the amount of your income. You add the capital gain to your income for the year, including money you receive from your job, side hustles, dividends in non-registered accounts, any selling of assets and so on.
Capital gains are taxed as part of your income on your personal tax return. Below are the federal tax brackets for 202, which can give you an idea of how much tax you may owe for the year. You will need to figure out the provincial tax bracket rate for your province or territory, too. Since Canada has a tiered tax system, you will have to do a bit of math to estimate your annual income tax, breaking down your total tax into the brackets, and the amount owed for each bracket.
The first column is the tax rate, meaning the percentage of the income that is considered taxable (this doesn’t include deductions, of course). The second column is the range of income for that tax rate. Say you earn $60,000 a year, $55,867 would be within the 15% tax rate and $4,133 is in the 20.5% rate ($60,000 – $55,867). That’s right your income is taxed through the tax brackets, and not on a flat tax rate. This is what’s called “a progressive tax system,” meaning that Canadians with lower incomes are taxed at a lower rate, and tax rates rise incrementally for higher-income earners.
| 15% | Up to $55,867 |
| 20.5% | $55,868 to $111,733 |
| 26% | $111,734 to $173,205 |
| 29% | $173,206 up to $246,752 |
| 33% | $246,753 or more |
Read on for the provincial and territorial tax brackets.
And, of course, to really get down to the nickel of how much you ultimately owe, you will need to do your tax return and receive a notice of assessment.
It’s worth noting that there can be other factors for calculating capital gains. Here are some articles that delve deeper into some of these specific situations.
It’s not so much that you can avoid capital gains tax, but that there are CRA rules that you can take advantage of to reduce the amount you may owe. Here are a few:
First is the principal residence exemption. You don’t pay tax on the sale of your home, but you may have to for a secondary property or residence, and/or investment property. According to the CRA, a property is exempt from capital gains tax if your situation meets these four criteria:
There is also accounting for outlays and expenses. From your capital gain, you can subtract the costs necessary for selling the property, such as renovations and maintenance expenses, finders’ fees, commissions, brokers’ fees, surveyors’ fees, legal fees, transfer taxes and advertising costs.
You can also claim capital losses when you have capital gains. So if you have assets, not limited to property, that you earned income on, you can lower your gains by applying your capital losses to that amount (until it reaches $0). That can be losses from other property, investments in non-registered accounts, and other capital.
The Ask MoneySense column has answered the following questions on reducing the amount of income for capital gains:
The obvious answer is whomever is earning the capital gain, right? Not always. There can be less obvious scenarios involving multiple owners or even unfortunate situations that include the death of a property owner. If that’s the case for you, our readers can relate. Here are some of the tricky circumstances they have faced when selling a property.
We also have a category of questions about capital gains that can’t be categorized, but these articles are popular with readers. So we hope that they may be an asset to you, too—free of charge (see what I did there?).
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These Liberals have to GO before they completely ruin our country
Justin Trudeau is destroying the Canadian dream.
I wish more people understood how this works because we paid capital gains in 2018 and with these changes we would have paid LESS. The people saying the liberals need to go don’t understand basic math.
That’s B.S. Mary Smitt. The LIBERALS increased the capital gains from 50% to 66.65%. If you paid capital gains in 2018, you would be paying an incredible amount more.
And if you think the Liberals are good for Canada, then you are part of the problem we have today.
Can you deduct the interest you paid on a mortgage as part of the capital gain?
If one buys property for 200,000 and sells for 400,000 but there is still mortgage of 100,000 on it, what is the real capital gain? Is it 200000 or 100000 less other expenses?
What happens if I sell a rental property and there is mortgage that I must pay back. It is not a gain and must be returned to financed.
Can you comment on this please.
how do i sell 50% of my rental house to my daughter without paying capital gains on the entire amount?
i assume im selling i have to sell 100 percent of my house ; 50% to my daughter and 50%back to me (i am selling entire house technically.Do i have to pay capital gains on entire sell )
i have 1,000,000 gain (i bought a house for 300,000 30 years ago and now it sells for 1,300,000)
Just to let you know, the links under Ask MoneySense above don’t seem to be correct (e.g. selling foreign property).
Thank you for letting us know. We have updated the links.
There’s some confusion all over the internet on how this is applied. If I sell a rental property and my capital gain is $240,000. I assume I’m still taxed on 50% of that. So $120,000 is added to my income for the year and then taxed at my marginal tax rate.
But, with the new Capital Gains adjustment , if I sell for a capital gain of $300,000 how much is eligible to be taxed;
a. 50% of the first $250,000 – ($125,000), plus 66.66% of the remaining $50,000 ($33,300), for a total of $158,300 at my marginal tax rate:
OR
b. 66.66% of $300,000. Thus $199,800 added to taxable income, at my marginal tax rate.
I built my home and reside there. Do I pay capital gains when I sell?
I don’t know how many articles I’ve read on this, but not one of them shows the entire concept and breakdown of numbers. A whole page of explanations and not one example. Unbelieveably annoying- like most educational things in Canada.
The capital gains you pay is just on any PROFIT you make off the sale (thus just like extra income for the year)
You buy a cottage for $50,000 +2,000 closing costs. You then do some renovations for $3,000. A couple years later you sell for $60,000. So you take 60,000 – 52,000 (what you paid) = $8,000 profit. Then subtract renovations $8,000-3000 = $5,000. Then you can subtract any costs from the sale… so say it cost $1000 to list it. 5,000-1000 = 4,000. So your profit from the sale is $4000 and you then have to pay capital gains on that at 50%… so you owe $2,000 in Captial gains.
If you bought that cottage for $52,000 and only ended up selling at $50,000 there are no capital gains because you took a loss and made no profit.
If you bought the cottage for $50,000 and sold for $60,000 but still owed $5000 on the mortgage then your profit off the sale is only $5000 and you pay capital gains on 1/2 of that… so $2,500.
What if 3 family members bought a piece of property together and spent a bunch of money developing the land lots of which was in sweat equity. Cutting trees, installing sewage lines building a permanent building, etc. Can the developing costs and sweat equity be removed from the profit to lower the amount of profit and this capital gains?
There are some incorrect posts and unanswered questions on this board.
In Canada you cannot add mortgage payments to your costs and you do not deduct a remaining mortgage from your ‘profit’. If you buy a cottage for $50k and sell it for $60k, the capital gains is $10k and it’s irrelevant if you have a $40k mortgage, a $5k mortgage or no mortgage.
If you buy a property for $200k, sell it for $400k and have a $100k mortgage, the capital gain is $200k (before any other deductions of capital improvement—not maintenance—costs). 50% of that ($100k) is added to your income to calculate tax. You will owe at least $20k in income tax due to the capital gain. A mortgage is not a capital cost; it’s a finance cost and can dramatically increase (or decrease) your rate of return (profit on the personal money invested).
The ‘profit’ is your capital gains.
You don’t ‘pay capital gains’; you are taxed on capital gains by having it treated as income on your tax return. The actual tax rate and tax paid depends on your total income.
If you sell for a capital gain of $300,000 then 50% of the first $250,000 – ($125,000), plus 66.66% of the remaining $50,000 ($33,300), so a total of $158,300 is taxed at your marginal tax rate.
You can sell just 50% of a property. If it’s worth $1.3 and paid $300k, then sell half for $650k for a capital gain of $500k (before any deductions). Get a lawyer to explain how.
You can claim reasonable costs for ‘sweat equity’; won’t have receipts for everything. If you personally cleared 30 trees to build, then can claim what an arborist would have charged at the time. Same with building a deck, painting, etc. Don’t get greedy or you could be audited. You should have pictures and need to demonstrate it’s required for capital improvement.
Hello. I was wondering: I have a rental property. It’s an apartment condo, on which I still have a mortgage. If I were to sell the condo, but transfer the mortgage onto a house, and basically switch from the condo to a house, which would also be a rental, but where I would keep the same mortgage, do I have to pay capital gains tax on the sale of my condo? Thank you.