Capital Gains Tax: What You Need to Know
When it comes to real estate transactions in Ontario, Canada, capital gains tax is an important factor to consider. Capital gains tax is a tax that is levied on the profit that you make from selling an asset, such as real estate. In this article, we will take a closer look at capital gains tax as it applies to real estate transactions in Canada.
What is Capital Gains Tax?
Capital gains tax is a tax that is applied to the profit that is made when an asset, such as real estate, is sold. The tax is calculated by subtracting the original purchase price of the asset from the sale price. The resulting profit is then subject to tax at the capital gains tax rate.
In Ontario, the capital gains tax rate is currently 50% of the individual’s marginal tax rate. This means that if you are in the highest tax bracket, you will pay 50% tax on your capital gains. If you are in a lower tax bracket, you will pay a lower rate of tax on your capital gains.
When Does Capital Gains Tax Apply to Real Estate Transactions in Canada?
Capital gains tax applies to real estate transactions in Canada when the property is not considered to be the individual’s principal residence. A principal residence is a property that the individual lives in for the majority of the year. In this case, the individual is not subject to capital gains tax when they sell their home.
However, if the property is not the individual’s principal residence, capital gains tax applies. For example, if an individual purchases a rental property and sells it for a profit, they will be subject to capital gains tax on the profit they made.
Let’s look at an example. John purchased a rental property in Toronto for $500,000 in 2010. He rented the property out for 10 years, and then sold it for $750,000 in 2020. The capital gains tax that John would be subject to is calculated as follows:
Sale price: $750,000 Purchase price: $500,000 Profit: $250,000 Capital gains tax: 50% of marginal tax rate
Assuming that John is in the highest tax bracket, his marginal tax rate would be 53.53%. Therefore, his capital gains tax would be calculated as follows:
Capital gains tax = $250,000 x 50% x 53.53% = $67,132.50
John would be required to pay $67,132.50 in capital gains tax on the sale of his rental property.
When Are Exemptions Available?
There are some exemptions available when it comes to capital gains tax on real estate transactions in Canada. One of the most common exemptions is the principal residence exemption. As mentioned earlier, if the property is the individual’s principal residence, they are not subject to capital gains tax when they sell their home.
In addition to the principal residence exemption, there are other exemptions available for certain types of real estate transactions. For example, if an individual sells a property to their spouse or common-law partner, they may be able to use the spousal rollover provision to defer capital gains tax.
Another exemption is available to individuals who sell farmland or fishing property. These individuals may be able to use the lifetime capital gains exemption, which allows them to shelter up to $1 million in capital gains.
Capital gains tax is an important consideration when it comes to real estate transactions in Canada. Individuals who sell a property that is not their principal residence may be subject to capital gains tax on the profit they make. The capital gains tax rate is currently 50% of the individual’s marginal tax rate.
However, there are exemptions available, such as the principal residence exemption, the spousal rollover provision, and the lifetime capital gains exemption.