If you are thinking about downsizing and selling your current property, you are likely wondering what taxes are associated with the upcoming sale. We are here to answer all of your questions—but first, make sure you’ve covered all your bases with our handy Home Sellers Checklist, and don’t hesitate to reach out to West Haven Group for all of your listing needs.
Now, let’s focus on the question at hand – do you have to pay tax when you sell your house? This isn’t a simple yes or no answer but we will help break it down.
Let’s start with the concept of Capital Gains
As we outlined in our blog, Capital Gains in Vancouver- How to Reduce Your Taxable Income, a common misconception of capital gains is that it is a tax in and of itself. However, there is no ‘capital gains tax.’ In its most simple form, you incur a ‘capital gain’ when you sell your property, for more than you purchased it for. Conversely, if you sell your property for less, you would incur a capital loss and can use that loss to offset other capital gains or carry it forward to offset capital gains in future years.
So, when do you have to pay tax and how much is it?
Since the capital gain is a form of personal income, you are required to pay tax on it…sometimes.
Whether you have to pay tax on this comes down to your use of the property. Has this property been your principal residence for every year that you’ve owned it? If so, then you are exempt from paying taxes on any gain from the sale. However, it is crucial that you still report the sale of your property on your income tax and benefit return in order for the CRA to recognize the principal residence exemption.
If your property was not your principal residence for the entirety of ownership, then you have to report the part of the capital gain for these years. This is why it is important to talk to an accountant and a real estate agent if you are considering buying another property to make sure you have a smart plan in place for your properties to protect yourself and your investments.
If it is an investment property, a rental, or a vacation home then you likely can expect to pay capital gains upon selling if you make a profit—although there are fees and deductions that will affect the gain itself, such as costs associated with buying and selling.
In terms of the actual amount, in Canada, you typically have to include 50% of the capital gains as income on your tax return. Keep in mind though that there are differences based on the provincial and national tax rates, as well as your personal tax bracket due to the taxable portion of your capital gain being added to your annual income—this is not a stand-alone payment.
Other types of tax
For this particular article, we’ve focused purely on the taxes you may have to pay upon selling your home but keep in mind that there are other taxes when it comes to property ownership including:
Property Transfer Tax: When you purchase or gain an interest in a property, you have to pay the transfer tax based on the market value of the property at the date of registration unless you qualify for an exemption.
Annual property taxes: Annual property taxes are paid for each property you own to fund services in your area.
Withholding Taxes: If you are a non-resident selling property in Canada, your lawyer is required to hold in trust 25% of the gross proceeds of the sale for your share of the property, until the issuance of the Certificate of Compliance by the CRA.
If you want to learn more – check out another article from our capital gains series, How Do I Report Capital Gains in BC?
We are here to help
While West Haven Group is a team of real estate specialists, please keep in mind we are not tax professionals. For more in-depth details on this, we recommend reading the Government of Canada’s Disposing of your principal residence article and also seeking advice from an accountant. Please reach out to discuss your property needs, we can’t wait to connect.