Are you the owner of a rental real estate or an investment property? Are you thinking of selling or have already sold your investment property? In this article, we will discuss the various tax implications of selling investment properties in Canada. This section is broken down into 2 parts: Taxable Capital Gain & Recapture of CCA. Please read below to understand each section.
When you sell investment real estate property in Canada, you are required to pay Capital Gains Tax on the profit you made from the sale of real estate. The Taxable Capital Gain is calculated as follows:
Taxable Capital Gain = Net Selling Price Less Adjusted Cost Base / 2
Net Selling Price is calculated as: Sale Price on the Purchase and Sale minus Legal fees paid to the lawyer minus Commissions paid to the real estate agent minus other applicable selling costs
Adjusted Cost Base is calculated as: Original Purchase Price (as on Sale & Purchase Agreement) + Land Transfer Tax Paid + Legal fee paid to lawyer on closing + improvement cost made to the property.
Improvements made to the property are renovations and expenses that extend the useful life of your property or improve it beyond its original condition e.g., installation of new windows or new furnace that will last a long time and will extend the useful life of the property. Normal everyday repairs are not added to the cost of property. The more improvements to property, the greater the adjusted cost base and therefore lower Capital gain.
Tax Tip: Keep all the receipts related to the major improvements to claim the cost as CRA may ask for receipts.
Recapture of Tax Depreciation Claimed
If you have a rental property and you are thinking of selling it, keep in mind that all the CCA claimed in the prior years will be included in your income when you sell your capital investment. For example, if you claimed $50,000 CCA / Tax depreciation to lower your rental income in the prior years, then you will have to include the full $50,000 CCA claimed as your income when you sell it.
Tax Tip: If you are anticipating a sale of investment rental property in the near future, avoid claiming tax depreciation in order to avoid paying greater taxes at the sale at higher marginal tax rate.
The Real Estate Sale Tax Return will therefore include 2 parts: Taxable Capital Gain AND Recapture which will be taxed at your marginal tax rate. Client situation will vary.
Filing Real Estate Sales Tax returns can sometimes be tricky and require professional insight and experience to file in order to save taxes. At Bajwa CPA Professional Corporation, we take time to understand each client’s situation and offer professional tax filing services. You can also take a look at the list of our accounting services that we provide to businesses and individuals.
Disclaimer
The information provided in this blog post is intended to provide general information. You should consult with a tax professional to full determine the scope of your situation, Vaishali Bajwa and Bajwa CPA Professional Corporation shall not be held liable from usage of the information provided on this page.
ABOUT THE AUTHOR
Vaishali Bajwa
CPA, CGA
Vaishali Bajwa CPA, CGA is the founder of Bajwa CPA Professional Corporation who has years of extensive professional experience in public practice working with highly satisfied business and individual clients to ensure their taxes are minimized and accounting needs are fulfilled. Bajwa CPA mission is to provide valuable tax planning, accounting, and income tax preparation services in the Greater Toronto Area.
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