Capital Gains is the difference between the sale price and the purchase price of income property and Capital Gains taxes are due when the property is sold or upon the death of the owner.
More specifically, here’s some insight on Capital Gains Taxes in Canada in 2021
The question is – Is it better to sell your income property now or is best to leave the property to your heirs? The latter begs the question – if I leave it to my heirs, do they pay the taxes on those Capital Gains?
Answer: When you inherit any asset that could increase in value before being sold, it’s important that you get some sort of proof of its value at the time it was left to you. This may mean bringing in a third-party appraiser.
Without credible proof of the fair market value at the time of inheritance, you may be forced to accept the Canada Revenue Agency’s estimate of its value, which could work against you.
In Canada, 50% of the Capital gains is taxable and is added to your regular income. You are then taxed according to your level of income that year, including all revenue streams
So for example, if your Capital Gain was $400,000 from the sale of a property, 50% of that amount is %200,000 and is subject to being taxed.
The original purchase price of the investment (property, in this case), plus the costs to acquire it (fees) is called the Adjusted Cost Base. Once you know what that number is, you can figure out the taxable amount.
Tax Deferral Provisions
There is a tax deferral provision that states you can spread out the capital gain portion for the amount of a seller take back mortgage for a maximum of five years. For capital gains they take half the capital gain, add that to your present taxable income for that year and then you pay income tax on whatever tax level that brings you to.
So, using the example above, if you sold a piece of income property and had a capital gain of $400,000.00 you would have HALF of that (ie $200,000.00) added to your regular income and then you would be taxed on the $200,000.00 PLUS your regular income.
HOWEVER, if you took back a seller take back mortgage for $200,000.00 then that would generate a capital gain of $200,000.00 over 5 years = $40,000.00 a year on that portion resulting in a taxable capital gain on the mortgage portion of half that or $20,000.00 plus HALF the other $200,000.00 capital gain or $100,000.00 so your taxable capital gain the first year would be $120,000.00 instead of $200,000.00 and then an additional half of $40,000.00 or $20,000.00 a year for the next four years. This will reduce your overall tax payable on the full capital gain.
There is a MAXIMUM DEFERRAL of the entire CAPITAL GAIN that you could place in a take back mortgage, which is 80% of the capital gain.
Using the $400,000.00 example we used earlier:
In year one, 80% of the Capital gain is $400,000.00 X .8 = $320,000.00 in a take back mortgage.
In year two of the capital gain that would be 60% or $400,000.00 X .6 = $240,000.00,
In year three 40% or $400,000.00 X .4 = $160,000.00,
In year four 20% or $400,000.00 X .2 = $80,000.00.
Year five would be the balance remaining of the 100% if there is any left to spread out for tax purposes.
I am passionate about helping you own your own home, even if you have borderline credit or need down payment assistance. Interested in real estate investing? I have specialized investment programs. Ask me!
Tom Booth, Broker at StreetCity Realty Inc.