Capital Gains Tax – 3 Facts You Should Know
In the heat of the housing market, the media drew a lot of attention towards real estate “flipping” in BC. Buyers and sellers were purchasing properties and reselling for a profit, not before long the government implemented policies that required a lot more disclosure throughout the buying and selling transaction as well as distinguishing an individual’s primary residence. The government wanted to make it easier to track properties turned rentals, recreational homes or even a little of both. As a result, they hired an undisclosed number of works at the CRA (Canada Revenue Agency) to investigate these “tax cheats”. Below we’ve disclosed the top 3 facts you should know about Capital Gains Tax, #3 could save you thousands!
1. What is it?
Capital gains tax is based on an increase in value of real estate or an investment. It applies to real estate that is not considered your primary residence and to stocks held in a non-registered investment account. This “gain” may be short term or long term and is not realized until the asset is “sold”. Capital gains tax is applied when the investment or real estate is worth more at the selling point than it was at the time of purchase.
*Capital Gains Tax must be claimed on income taxes and paid during the income tax year you’re filing
2. How is it calculated?
The total net gain is divided by 2 (50%) and then added to your income. It can also be split between spouses if the asset it jointly held. The gain is calculated at the time it’s sold and is added onto the asset owner(s) total income for that year.
John and Jane bought a rental condo in 2011 for $200,000 in Abbotsford, BC. In 2017 they decided to cash in on their gains and were able to resell their rental property for $400,000.
Sale price 2017: $400,000
Deduct the following:
- Original purchase price: $200,000
- Legal and realtor fees (from original purchase AND resale): $20,000
- Property transfer tax (only if it was not deducted on 2011 income tax)
Total deductions: $220,000
Capital gain: $180,000/2 (50% capital gain) = $90,000
*Since the property was purchased equally between John and Jane, the total capital gain will be split between the both parties.
John’s income in 2017: $90,000 + $45,000 = total income in 2017: $135,000
Jane’s income in 2017: $90,000 + $45,000 = total income in 2017: $135,000
Per asset owner: $45,000 x 36.5% (new tax bracket) = $16,425
Taxes owing for each asset owner = $16,425
3. How can you avoid it?
Putting money into a Registered Retirement Savings Plan (RRSP) can help you avoid paying this hefty tax.
Using the example above: Assuming they have the contribution room to do this, if John and Jane invest $45,000 into their own individual RRSP account, they would avoid paying the entire tax hit while still having it available at their disposal and best of all…tax free.
This is an excellent way to jump start your retirement savings all while getting out of having to the pay the government a hefty chunk of change.
How to Open an RRSP Account
Nathan Estabrooks of By Referral Mortgage Consultants, is a fully licensed investment advisor through IIROC, Peak Securities. Nathan is a true expert in the field of investments and would be more than happy to walk you through the steps required for you to open your own RRSP account.