A capital gain is triggered when the value of an asset increases compared to what was paid to acquire the asset. Conversely, a capital loss is where the value of an asset decreases compared to what was paid to acquire the asset.
A realized capital gain (or loss) refers to the amount that the asset appreciated (or depreciated) in value at the time it is actually sold. An unrealized capital gain (or loss) refers to the amount that the asset appreciated (or depreciated) in value at a specific point in time, but where the asset has not been sold. In other words, the gain (or loss) ‘on paper’.
In this article, we are going to discuss capital gains as it pertains to real estate only, and as it pertains to Canada only.
In Canada, property owners may or may not have to pay tax relating to a capital gain, it depends on the circumstances. They do not have to pay tax on the capital gain if the capital gain relates to their primary residence or a property that they designate as their primary residence. This is called the principal residence exemption. They do have to pay tax on the capital gain if the capital gain relates to a property that was not their primary residence (investment property, rental property, vacation property, etc.). Only one property can be designated as the primary residence in any given time tax year.
There is not a capital gains tax. Rather, the tax relating to a taxable capital gain works as follows: (End sale price minus the costs of selling) minus (purchase price minus the costs of acquisition) = the capital gain (note that significant renovations or improvements to the property can be added to the cost base of the property). Of this capital gain, 50% is taxable and therefore referred to as the taxable capital gain. The taxable capital gain is then added to the owner’s income for the year and their income tax rates then apply. Please note that by adding this additional income it is likely that the taxpayer’s tax rates will increase as a result of the added income in the tax year.
It should be noted that if a property decreases in value, therefore, incurring a capital loss, this loss does not get applied to the taxpayer’s income (i.e. reducing income). It can only be applied to other capital gains. If the losses cannot be used in that particular tax year, they can be “carried back” 3 years, or “carried forward” indefinitely.
Notes on qualifying factor for a primary residence (all of the following must apply):
· You, your spouse or former spouse or common-law partner, or any of your children ordinarily inhabited the home throughout the year(s) that you are reporting it was your principal residence.
· Must have truly intended for the address to be the primary residence.
· If, during any of the years that a principal residence was owned, it was not used as the principal residence, then for those years the capital gains exemption would not apply.
Notes on taxable capital gains:
If two or more people are on title to a non-principal residence property, the taxable capital gain is divided by the number of owners, and then 50% of that number is added to each person’s income for the year.