Return of the Return
For most Canadians, the time for tax returns is the same every year: April 30th. Individuals fill out the appropriate forms in order to report the salient details of the prior fiscal year (so on April 30th, 2019, the taxes being filed will relate to January 1st, 2018 to December 31st, 2018).
The tax return is concerned with taxable income and tax credits (and details concerning the two). At the end, you’ll end up with a certain amount owing to the federal government, or an amount to be refunded.
Taxable income often refers to pay from a job, and this is a fundamental part of the tax return for many Canadians (T4 slips flutter through the nation like migratory birds).
Today, we’ll be discussing taxable income, but we’re not concerned with T4s: today, we’ll be looking at capital gains. Capital gains tax relates to money you made through an investment (‘capital’ that has ‘gained’ value): whether it be bonds, RRSPs, or one’s home (and the sale thereof).
So, in as few words as possible, are you required to pay capital gains tax on real estate? Yes and no. No, this isn’t doublethink – it’s just that, as with many things pertaining to taxation, there are special conditions and exceptions.
Before we go further, we hope that by unraveling this subject, taxes might feel a little less overwhelming. The tax return can seem complex from afar, but once we break it down, it becomes much more manageable.
That said, if you’d like to bolster your tax understandings, and ensure everything is filed correctly, it’s wise to consult with an accountant.
There is one specific case in which you will not have to pay any capital gains tax on the sale of real estate: if it is your primary residence. What does this mean, and how does a home qualify?
Essentially, a property will qualify if it serves exclusively as your principal residence for every year that you own it (from the date of purchase up to when you’re selling it/buying a new home).
Prior to 2016, these sorts of sales did not even need to be reported to claim the principal residence exemption. Now, you will need to have designated the property as your principal residence (find the “T2091IND Designation of a Property as a Principal Residence by an Individual [Other Than a Personal Trust]” here) and report the sale and designate the property on Schedule 3, Capital Gains (or Losses).
To summarize: you will likely be exempt from capital gains tax on the sale of a property that served as your primary residence (and was declared as such).
85 SPRUCE Street Unit# 106, Cambridge, N1R4K4
85 SPRUCE Street, Cambridge, Ontario N1R4K4More
62 HEALEY Street, Elora, N0B1S0
62 HEALEY Street, Elora, Ontario N0B1S0More
31 KENT ST, Guelph, N1H3B6
31 Kent Street, Guelph, Ontario N1H3B6More
#24 -166 DEERPATH DR, Guelph, N1K0E2
166 Deerpath Drive, Guelph, Ontario N1K0E2More
115 ALLEN Street W, Waterloo, N2L1E8
115 ALLEN Street, Waterloo, Ontario N2L1E8More
31 KENT ST, Guelph, N1H3B6
31 KENT ST, Guelph, Ontario N1H3B6More
10 SALMON WAY, Whitby, L1N9M8
10 Salmon Way, Whitby, Ontario L1N9M8More
647 GRANGE RD, Guelph, N1E7L7
647 Grange Road, Guelph, Ontario N1E7L7More
You are allowed one year of non-primary status – for example, if you bought a home in 2010 and lived in it as your primary residence from 2010-2015 with a single year gap in the middle, you should be exempt if the sale takes place in 2015.
Properly declaring everything with the Canada Revenue Agency is important to ensure you are taxed properly (again, it can be highly worthwhile to have an accountant look into things, and/or to familiarize yourself with the pertinent documents [like this]).
Capital Gains on Real Estate
Now: when will there be capital gains taxed applied to selling real estate? For one, if you sell other properties in addition to your primary residence, these will be considered investments and thus will be taxed.
If you sell your primary residence, and two other properties, in the same fiscal year, you will be taxed on the sale of the two additional properties, for example.
Setting aside capital gains tax on the sale of investment properties for a moment, there is another tax to consider when it comes to selling real estate: you might be responsible for income tax. If it’s determined that selling homes is part of your job (or your job, full stop – your ‘taxable income’) then the revenue would be subject to relevant income tax calculations.
As noted, capital gains tax relates to money you generate on investments (‘appreciation’).
The sale of properties other than your primary residence will be subject to capital gains tax. If this is simply something you’re doing on the side – a static income of sorts – then it stops at capital gains. However, if you are purchasing and re-selling homes as part of a fulltime job, it can be considered taxable income.
This can come down to the CRA’s discretion, taking factors like period of ownership, number of similar transactions, and importantly, your intentions at time of purchase.
If your job revolves around trading, including regularly purchasing and re-selling homes, it becomes an income tax matter. This applies primarily to ‘flippers’ (people who purchase a property and quickly resell it for a profit; ‘flipping’ it) and builders.
Note that this does not, however, apply to real estate agents involved in the sale of a client’s property.
The service provided by a realtor pertains to managing the transaction – that service is the realtor’s ‘product,’ and therefore means of income, and it is on that income that they are taxed. When representing a client, the realtor is not personally buying or re-selling a given property.
That said, it’s also important to note that in no way does this mean real estate agents are exempt from these taxes (capital gains and otherwise). Real estate agents who have their own real estate investments will be taxed normally, as with anyone else.
And if a real estate agent were also a builder, or involved in flipping with their own finances/initiative, they would be subject to income tax on that business.
Taking Things Into Account(ant)
We’ve said it a couple times already, but one more time doesn’t hurt: if you’re unclear on which forms to fill out, or what taxes your investments (and property sales) will be subject to, do look into a reputable accountant.
Particularly when it comes to high value items like real estate sale, it’s important to make sure everything is recorded and reported accurately.
Investing in real estate, and selling properties, is a great way to bolster your income. It can also be a highly lucrative job in and of itself. They come with their own rules and regulations when it comes to taxes, but that’s just one part of the overall picture.
If you’d like to know more, please don’t hesitate to contact us!
Written by Will Kummer