In the first part of our capital gains series- Capital Gains in Vancouver- How to Reduce Your Taxable Income– we looked at what capital gains are, how they’re incurred and potential ways to mitigate or minimise the tax payable when you sell your property in Vancouver. Once you have determined whether you have incurred a taxable capital gain, it’s important to understand the process of how to actually report it to the Canada Revenue Agency.
When Do You Report a Capital Gain or Loss?
Reporting a capital gain or loss is required when you have disposed of a capital asset. For ease of understanding, we will refer to property (real estate) as that asset from here on in. You are required to report this gain in the same calendar year that you sell the property (January to December).
It’s also important to note that regardless of whether you made a gain or loss, or whether you are required to pay tax on that gain (for example, if it was not your primary residence), you must still report the sale on your income tax return.
If the property was your primary residence you will not be subject to tax on the capital gain. However, if it was a second property, 50% of the gain you make from the sale of the property is considered taxable income.
As a reminder, there is no stand-alone ‘capital gains tax.’ Rather, this figure needs to be added to your personal income for that calendar year, and you will be taxed on your overall income (including this figure), based upon your marginal tax rate for that calendar year.
How to Calculate Your Capital Gain
When it comes to calculating your capital gain on real estate, you first need to determine your adjusted cost base. This is the overall cost of the property, not just the original price you purchased it for. We strongly recommend the use of an accountant or financial professional in this step, but for the sake of example let’s say:
You paid $500,000 for your property
Plus an additional $25,000 in fees to acquire and sell it.
And whilst living there, spent $125,000 on renovations/permanent improvements
Your adjusted cost base would be equal to $650,000.
If you then sold the property for $750,000 your capital gain is actually $100,000, as opposed to $250,000 (based on the original purchase price alone).
Of this $100,000 only 50% is taxable. Although you need to report the transaction itself, only $50,000 would be added to your annual income for that calendar year, and you will be taxed depending on the marginal tax rate that applies to you.
How Do I Report Capital Gains Tax in British Columbia?
In B.C., capital gains or losses are reported on a Schedule 3 form. It is a self-reporting system, and once you have calculated your adjusted cost base and other expenses is really just a simple form to record the numbers. Of course, you are also required to have evidence to substantiate these figures. The submitted form must include:
The year of acquisition (the year you purchased the property in B.C.)
The proceeds of acquisition (the sale price)
The adjusted cost base
Any fees or costs associated with the sale of the property
The overall capital gain (or loss) resulting from the sale of your property
The Schedule 3 form for reporting capital gains (or losses) in BC
If you’re looking for ways to defer or minimise your capital gains, or aren’t sure if you’ve incurred a capital gain, please reach out and connect with our team. As some of the top-performing Realtor’s in Vancouver, our team is ‘on the ground’ and always adapting to the current state of the market, in order to assist our clients to acquire and profit from their property investments.
In Canada, buying and selling assets- at a profit- is considered a form of additional income. This profit is referred to as capital gains, and, as with any form of income, it can also incur additional tax. Although capital gains are not a tax in and of themselves, they do count as income in most circumstances. Whilst you may incur capital gains on a wide variety of tangible and intangible assets, today we’re looking specifically at real estate, to determine if your capital gain will count as income.
I Just Sold My Property- Does That Trigger a Capital Gain?
A capital gain is triggered when the value of an asset increases compared to what was paid to acquire it. This is also known as a ‘realised’ capital gain, and when it comes to physical property like your house, the rules are no different.
Regardless of when the property was purchased, if it is sold for more than the original purchase amount- it triggers a capital gain.
The good news is that only a portion of that capital gain is considered income. Regardless of where in Canada you live, that portion is 50% of the capital gain (after deducting expenses). The confusion surrounding capital gains is usually surrounding how it is taxed, and how it actually affects your income.
So to simplify it- the actual tax you pay depends upon your other sources of income in the same calendar year that you sell your property. Your total income determines your personal tax rate, and in circumstances where the capital gains count as income, the dollar amount is added to your personal income. It is not taxed separately.
There are, however, a few situations where your capital gain will not be considered income.
How Do I Know If My Capital Gains Count as Income?
There are two primary test cases to determine if your capital gain will be counted as income.
Was the property your primary residence, or designated as such? If yes, the capital gain will not be counted as income, and will, therefore, not affect your taxable income.This is particularly important for people with more than one property, as it may be beneficial to declare the more highly valued property (or whichever property has/stands to make the largest capital gain) as the primary residence.
Did you purchase the property using your Registered Retirement Savings Plan (RRSP)or similar initiative? Any investments made under these schemes are tax-sheltered and the capital gain will not count as income.You will still pay tax on it eventually, but in most circumstances, it will not be until retirement, and then it will be at the marginal tax rate. It also means that any RRSP investments compound at a pre-tax rate, giving your investments (and retirement savings) a boost in the long term.
There are some mitigating factors which may also change the nature of your capital gain, such as whether you inherited the property. For example, if the property that is passed down was a principal residence, it will not trigger a capital gains event, and therefore not be counted as additional income.
On the other hand, if more than one property is passed down, the capital gain (assessed based on the fair market rate at the time of inheritance) will be considered income on each additional property. For strategies to minimise your capital gains, how much is counted as income, or the amount of tax you’ll pay on said gains, please see Capital Gains in Vancouver- How to Reduce Your Taxable Income.
The Vancouver property market has seen some incredible growth in the past few years. However, as properties are sold, if they have generated a profit, they also incur a taxable event. Otherwise known as capital gains, this figure is added to your personal income, or claimed by the estate. Understanding how this taxation works, as well as how to reduce, defer and mitigate this figure, could be crucial in deciding whether to purchase or sell real estate in Vancouver.
How Do You Incur Capital Gains in Vancouver?
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’ if/when you have sold your property, for more than you purchased it for. Conversely, if you sold 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.
Of course, this number is not a black and white figure. There are fees and deductions that will affect the gain itself, such as fees and costs associated with buying and selling said property. There are also other mitigating factors that may affect whether you incur a capital gain at all, such as whether the property was your primary residence or additional investment property.
Moreover, capital gains in Vancouver are taxed at the same rate as the rest of Canada. The differences between Vancouver ( and really all of B.C.) and the rest of the country comes down to the provincial and national tax rates, as well as your personal tax bracket. This is because the capital gain itself (or at least the taxable portion of it) is added to your annual income, rather than being a stand-alone payment.
Capital Gains isn’t a “tax,” it is a taxable event.
What Is the Capital Gains Rate in 2020?
The rate in 2020 is unchanged and remains at 50% of thecapital gain. When it comes to calculating what you owe, the following (simplified) example may help:
You purchased a property for $500,000 and sold it for $700,000.
The capital gain portion of the sale is $200,000.
The rate is 50% of the capital gain, so $100,000.
This figure -$100,000- is then added to your annual income for tax purposes, rather than generating a separate taxable item.
The amount you pay depends on the personal tax bracket you fall into, as the $100,000 gain counts as personal income. To calculate your cumulative total for the year, seethis link.
Can I Avoid Paying Capital Gains?
The short answer to this question is no. At some point, the tax owing from the capital gain will have to be paid. There are, however, a number of circumstances that mayreduce your capital gain, or allow you to defer the payment.
If the property is/was your primary residence, you do not incur a taxable event when it is sold. This is important for people with more than one property, as it may be beneficial to declare the more highly valued property (or whichever property has/stands to make the largest capital gain) as the primary residence.
The numbers aren’t so black and white. The actual figure for the cost of your property is derived from youradjusted cost base. That is, if you purchased your property for $500,000 and then spent $100,000 in permanent improvements, your adjusted cost base is actually $600,000. Then, if you sold for $700,000 your total capital gain is only $100,000 as opposed to $200,000.
Although we are using examples pertaining to the property market, capital gains/losses encompass all assets, not just real estate. This means that if you have made any losses (for example in stocks or bonds), you can use these losses to offset the capital gain made on your property, thereby reducing the income amount added to your overall income. Note: Capital losses can only be offset against other capital gains- it does not reduce your overall income by the loss amount.
As such, you may be able to reduce your capital gains in Vancouver by selling your property in the same year you have made other losses. Similarly, if you have losses from previous years carried forward, these can be applied against the capital gain and may reduce the taxable amount.
If you are in the position to, delaying when you sell your property may also factor into your strategy. For example, selling on or after January 1 puts you into the new financial year, giving you until April 30 the following year to actually make the payment.
Historically in the Vancouver property market,selling in Spring tends to attract higher prices. This may earn you both a capital gain and give you longer to make the repayment. Conversely, if you have made gains on a number of properties or other assets throughout the year, selling one at aloss before the end of the financial year may help you to offset some of them. In doing so you can effectively reduce the total annual gain, and the amount of tax to be paid.
Make voluntary contributions to your registered retirement savings plan (RRSP) to defer (and lower) the tax payable. This allows you to make contributions pre-tax for any given year and allows that contribution to grow tax-free until the time of withdrawal.
Although you can withdraw from your RRSP at any time, if you wait until retirement, that amount will have grown thanks to the power of compounding interest, and you will also only be taxed on it at the marginal tax rate. Presumably the tax bracket you fall into during retirement will be lower than during regular employment, thereby reducing your overall capital gain in the year you make it, as well as the tax payable longer term.
In 2020, themaximum contribution amounts to your RRSP is: —18% of total income earned/reported on your 2019 tax return —Up to a maximum value of $27,230.
So on a $100,000 capital gain you could reduce the sum that is added to your taxable income by $27,230. Depending on your other income sources, that figure could make the difference when it comes to assessing your personal tax bracket.
Additionally, the growth of RRSP investments is tax-sheltered. Thatmeans that any returns made within your retirement plan are exempt from additional capital gains, income, and dividend tax. It also means that any RRSP investments compound at a pre-tax rate, giving you a bit more bang for your buck.
What if I Inherited a Property?
Death and taxes are a certainty of life, and when it comes to taxes you are considered to have sold all of your assets/possessions one minute before you died. When it comes to inheriting real estate, any capital gain made on the property still creates a taxable event. However, in most instances, it is the estate that must claim/pay the capital gain.
If you are transferring the property to a beneficiary- your child, for example- the property is assessed at fair market value on that day, and any taxable event arising from that transfer or its subsequent sale is based on that amount.
For example, you purchased a property for $100,000 and at the time of your death, it was valued at $500,000, creating a capital gain event of $400,000. With the current 50% rate, $200,000 (or the amount after deductions) would then be added to the annual income of the beneficiary. The rate of tax they incur will depend on their individual circumstances. In addition, if you have more than one child, that $200,000 amount is split between the number of beneficiaries. Four children would result in each adding $50,000 to their personal taxable income.
Moreover, although the property can be transferred to a spouse tax-free, at the time of their passing, the gain will still be incurred and owed by the estate. Of course, planning ahead with your accountant, and making as many claims and deductions as possible can reduce the overall figure, however at some point, it will still need to be paid.
It is also worth mentioning that if the property that was passed down was the principal residence, the capital gains event will not be incurred. However, if you have more than one property at the time of passing, capital gains will need to be paid on each additional property.
At the West Haven Group, we can help you to sell your real estate assets at a time that is beneficial to you. We can also connect you to the right industry professionals, as well as help you to implement beneficial investing strategies. If you would like more information or would like to know whether now is the right time for you to sell your property in Vancouver, reach out and connect!
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