Selling a home in Canada is a big deal and understanding the tax implications is key to avoiding surprises. Some home sales are tax free, others will be taxable. A knowledgeable accountant Mississauga understands the rules and can help you make informed decisions to save money.
The Principal Residence Exemption (PRE)
The Principal Residence Exemption (PRE) is the biggest tax break for Canadians. You can sell your primary residence tax free.
Qualifying for PRE:
- The home must be your primary residence.
- You, your spouse or your child must have lived in the home during the time you owned it.
- One property per family unit per year.
For example if you’ve owned your home for 10 years and lived in it the whole time, the sale will be tax free under the PRE. But if you’ve rented the property or used it as a vacation home additional rules apply.
Taxable Capital Gains
If the property you’re selling is not your primary residence, such as a rental property, vacation home or investment property, you may have to pay taxes on the capital gains. A qualified accountant Edmonton can help you assess the tax implication. Here’s a simple walkthrough on how capital gains tax works.
Calculating Capital Gains Tax:
- Capital gains are the difference between the sale price and the adjusted cost base (ACB) which includes the purchase price and any expenses to acquire or improve the property.
- Only 50% of the capital gain is taxable.
For example:
- You buy a rental property for $300,000 and sell it for $500,000.
- Your gain is $200,000.
- The taxable portion is $100,000 (50% of the gain).
- If your marginal tax rate is 30% you’ll owe $30,000 in capital gains tax.
Partial Use as a Rental Property
If you rented part of your home you may only qualify for partial PRE. For example if you rented the basement and lived in the upper levels the exemption applies to the portion of the home used as your primary residence. Keep detailed records to calculate the tax implications correctly.
Flipping Homes and CRA Scrutiny
The CRA considers frequent home sales as a business activity rather than a capital transaction. If you buy, renovate and sell homes for profit you may be considered a real estate “flipper”. In this case:
- The income is considered business income not capital gains and 100% is taxable.
- The PRE cannot be claimed for flipped properties.
Reporting the Sale
Since 2016, Canadians must report the sale of their primary residence on their tax return using Schedule 3. Not reporting the sale even if it’s tax free can result in penalties and interest.
Tax Planning
To reduce taxes:
- Keep track of purchase costs, renovations and selling expenses.
- Time the sale to coincide with lower income years to reduce your tax rate on gains.
- Consult a tax accountant to explore income splitting or deferring gains.
Conclusion
Selling a home in Canada can have big tax implications depending on the type of property and use. Understanding the rules around the PRE, capital gains tax and reporting requirements will help you navigate the process with confidence. For complex situations, consult a tax advisor to ensure compliance and minimize liabilities.
