What you need to know about Capital Gains Tax on Real Estate in Canada Before You Buy

Disclaimer: This is an overview of capital gains tax in Canada. Please do not take this as personal or business tax advice. Consult your tax professional to make your tax plan.Before we even get into the tax part of this article, let’s define ‘capital gain’ and ‘capital loss’.

What is a capital gain?

Simply put, a capital gain is an increase in the value of an investment (stocks, investment funds) or real estate holding from the original price you paid for it. If the value of your asset increases, you have a capital gain. This means you need to pay tax on it. (Paying tax means you made money, so that’s ultimately a great thing!)

What is a capital loss?

A capital loss is just the opposite of a capital gain – the value of your investment or real estate holding has decreased in value. If you paid more for it than it’s worth today, you have a capital loss. You can use capital losses to offset capital gains and reduce your overall annual tax bill. In fact, you can carry capital losses back 3 years or forward into the future.

What’s the difference between ‘realized’ and ‘unrealized’ capital gains (or losses)?

Realizing a capital gain or loss happens when you sell your investment. If you sell for more than you paid, you have realized a capital gain. If you sell for less than you paid, the loss is realized. Conversely, an unrealized capital gain occurs when your investments increase in value, but you haven’t sold them. The good news is you only pay tax on realized capital gains. In other words, until you “lock in the gain” by selling the investment, it’s only an increase on paper.

Capital Gains Tax Rate

In Canada, 50% of the value of any capital gains are taxable. If you sell a property for more than you bought it for, you will be taxed on 50% of the difference in value. Here’s a simplified example:You buy a condo in 2020 for $200,000.You sell the condo in 2022 for $250,000.The increase in value is $250,000 – $200,000 = $50,000. This is the capital gain.You are taxed on 50% of the capital gain of $50,000. 50% x $50,000 = $25,000.

You must add $25,000 to your income at the end of year when you are calculating your personal income tax. The amount of additional tax you will owe depends on the total of your other sources of income. You may also add any costs associated with acquiring the property in the calculation as well, so the above example is an oversimplification.You will never pay capital gains tax on your principal residence. This only applies to secondary residences or investment properties. 

Capital losses can be carried over to the next year

Capital losses can offset capital gains. If it’s possible, they must be used in the same year, but if you only have losses or you have more losses than gains, you can carry them forward to future years to reduce your tax burden, or go back up to 3 years to adjust any taxes you paid in those years. I encourage you to consult a tax professional to assist with this. 

This is general information on capital gains to give you a better understanding of how it works. Since everyone’s situation is unique, this should not be taken as advice and you should always consult a tax professional to determine what works best in your specific situation.Real estate investing is a proven way to build wealth. Invest first in your principal residence, which is not subject to capital gains. Then (and in my opinion, only then) consider any number of real estate investment opportunities. 

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