Capital Gains. When you read that word did you cringe? Because I sure did. Below are some pointers to help you lower Capital Gains paid after the sale of your home! 

 

WHAT EXACTLY ARE CAPITAL GAINS? 

 

Capital Gains occur when you make money on something you bought. In our situation, it’s real estate. So capital gains on a home is when you make money on the sale of your home because it increased in value from when you originally bought it. But isn’t a home increasing in value the whole point of buying and selling real estate? Sure is, but getting taxed through the nose for it doesn’t need to be the main focus. 

 

The idea behind Capital Gains is to encourage people to invest in long term assets. 

 

 

WHEN AM I SUPPOSED TO PAY CAPITAL GAINS? 

 

In short, whenever you have an asset that appreciates in value, you will have to pay capital gain on it. In most cases, you do not pay tax on a capital gain until you sell that asset. 

 

Capital gains can be considered “realized” or “unrealized”. A realized capital gain is when you sell an asset and sold if for more than you bought it for. An unrealized asset is when you have an asset increasing in value, like a home or stocks, and have not sold them yet. 

 

 

HOW MUCH ARE CAPITAL GAINS? 

 

Capital gains is a form of income tax. It is added to your annual earnings. In Canada, 50% of the value of capital gains are taxable. Meaning, 50% of the total profit made on the home. So for simple math sake, if you bought a home for $500,000, and sold it for $800,000, you would pay 50% of the difference to add to your annual income tax. So the total you would add to your annual income tax would be $150,000 and the other $150,000 we will show you some tips and tricks on what to do with below. 

 

This “50%” is added onto your annual income. Meaning the amount of actual tax you will pay, will vary based on your total annual income. 

 

DO I HAVE TO PAY CAPITIAL GAINS? 

 

In short, yes (depending on situation). CRA will ensure you pay your portion to them. But there is an exception. If it is your principal and only residence, and meets all the requirements. Here they are below: 

 

  1. How long do I need to live in a residence to claim it as a principal residence and qualify for Principal Residence Exception?The CRA does not CURRENTLY have a hard rule on how long you must live in the dwelling to qualify for PRE. However, consult with a lawyer or real estate professional prior to making those decisions.

    The CRA does analyze evidence such as length of time in the dwelling, all sources of income, real estate purchasing patterns, to establish if the dwelling is actually a principal residence or if they are making an income on their principal residence etc. CRA may challenge your claim and ask what the reason for moving is.

  2. Can secondary properties, such as cottages, be made a principal residence and eligible for PRE?
    Most properties can be designated as a principal residence as long as the owner or the family inhabit it regularly throughout the calendar year being claimed. However, be aware, only one property, per year, per family, can be designated a principal residence. A capital gain can also arise if the residence is lived in for some but not all the years or ownership. When selling one of multiple properties, an owner can make it their principal residence for all or part of the years of ownership to be able to use the most of the exemption as they can and reduce the amount of capital gains paid.

  3. Can properties that generate income be deemed a principal residence and eligible for PRE?
    In short, no. Property that is used primarily to generate income or that is considered inventory does not qualify for PRE. This includes property that is soley rented out, or when the owner occupies one unit and rents out the others.

    Exceptions include, Air BnB type rentals which the owner otherwise occupies as their primary residence. 

 

 

SO HOW DO I MINIMIZE HOW MUCH I PAY IN CAPITAL GAINS?

 

There are a couple factors that can either inflate or deflate how much you pay in capital gains. When looking to sell your home, keep these factors in mind to help reduce the amount of capital gains paid.

#1 Timing is Everything

 

As mentioned above, capital gains are based on how much income you make total that year. So if you are having a year where you make less than normal, that might be the perfect time for you to sell and claim your capital gains. In short, the lower your income the lower your tax rate, the less in capital gains you pay! 

 

For example, if you sold an income property for a profit of $65,000. 

If your annual income was $100,000 you would pay $38,515 in federal and provincial tax (Varies based on province and situations) with a marginal tax rate of 43%. 

If your annual income was $50,000 you would pay $17,880 in taxes and your marginal tax rate would drop to 31.5% with total tax savings of $20,635. 

 

So many families will time the sale of their income property to be when they go on maternal/paternal leave. Or a year they know they will be making less in some regards maybe due to upgrading education or a big job change etc. Every situation is different. 

 

 

#2 Defer your Earnings 

 

A really great strategy to save on capital gains is to defer your earnings on the sale of your home because you only owe tax on earnings you received. 

Again, let’s assume your annual earnings where $50,000 and the sale of your property lands you $100,000 in profit. You would theoretically owe $24,500 ish in taxes for the first year, and about $8,000 in tax each year after that with a total hit of $48,500 ish. However, if you asked the buyer to stagger the payments so that you only receive $25,000 each year for the next four years, the total tax bill would be $46,800 ish. This doesn’t sound like a lot but when applying RRSP contributions, charitable contributions, and self employment expenses the tax savings add up very quickly. 

When looking to defer capital gains, there are a few rules to apply:
1. It can be claimed up to five years.
2. You must pay on a minimum of 20% of the earnings each year.



#3 Create Tax Deductions


Another great strategy is to claim capital losses to offset capital gains. Maybe sell as stock that is less that what you bought it for or sell something as a loss. However, once again, there are some rules that apply to this strategy as well:
1. The asset for sale must be sold for a fair market value. You cannot create a superficial loss by selling an asset for less the it is worth on an open market.
2. To use a loss or offset capital gains the asset cannot reside in a registered account such as a RRSP, RESP, RDSP, or TFSA.



#4 Contribute to Registered Accounts


Another great and beneficial way to offset capital gains is contribute to your RRSP! With the extra money earned from the property sold you can contribute to your RRSP to offset immediate taxes. You will have to pay taxes on it though when you withdraw from the account in the future. This strategy works best when an individual has a significant unused RRSP contribution from prior years.

 

 

#5 Avoid a Large Tax Bill as a Retiree or Someone Looking to Retire

 

People looking to retire and retirees should look to avoid fluctuating annual income as much as possible. Higher income can result in claw-backs of government income based benefits such as Old Age Security.
A great strategy for retiring or retirees is to split their income. Married and common-law couples have the ability to split their income in half (or by percentages) so if there is one spouse earning less they can even it out and pay less on total capital gains. 

Another great way is to use a TFSA to shelter investment income from tax and minimize or avoid reductions. 

 

 

#6 Charitable Donations

Another great way to offset capital gains is through charitable donations. If for example you were planning to make a charitable donation of $1,000, instead of selling the asset (say a stock), and paying capital gains on it, donate the stock. The charity will then give you a charitable recipe for tax purposes and it will not trigger capital gains. You can then use this charitable donation to offset capital gains on your home! 

 

When gifting assets to family it does not eliminate the capital gains. They will still need to be paid. However if the property has lost value, gifting it to a family member is in your best interests to keep it and use it as a capital loss. 

 

 

 

No matter what, be sure to consult with a lawyer, real estate agent or tax professional. Creative tax strategies can get you in lots of trouble and you could end up paying for life instead of just a couple thousand. The chances of you not paying capital gains at all is very low, however if you can lower them even a little, every dollar counts.