When investing in Real Estate be sure to consider Capital Gains Tax!
Capital Gains Tax in Canada- It's Important to consider
Capital gain is realized when you sell a capital asset and the proceeds of disposition exceed the adjusted cost base. Capital assets subject to this tax, according to the Canada Revenue Agency, include shares, bonds, buildings, land, and trust units.
The proceeds of disposition are what you sold your capital property for, less any outlays and expenses of selling. The adjusted cost base is what you paid to acquire capital property, including any costs related to purchasing the capital property.
The capital gains inclusion rate is 50% in Canada, which means that you must include 50% of your capital gains as income on your tax return. To calculate your average capital gains tax rate by dividing your capital gains tax by your total capital gains.
Adjusted Cost Base (ACB)
The adjusted cost base (ACB) is the cost of a capital property including any costs related to the acquisition of the capital property.
Adjusted Cost Base for Real Estate
For real estate properties, the adjusted cost base includes the purchase price of the property, closing costs, and capital expenditures on the property.
Closing costs are the fees that you as the buyer pay to acquire real estate property and include one-time fees such as the lawyer, land transfer taxes, and legal fees, and property survey fee home inspection fee. It is important to differentiate between capital expenditures and current expenses on your property.
Current expenses cannot be included in the adjusted cost base while capital expenditures should be included in the ACB, irrespective of when the capital expenditures were made during the entire duration of your ownership of the home.
Some examples of capital additions and improvements to your home include installing a waterproofing your basement, installing a new HAVOC system. Meanwhile, current expenses are monthly costs incurred by the homeowner or a tenant, hydro and electricity bills, restorations, painting the wall or replacing burnt out light bulbs.
The Canada Revenue Agency guidelines on current expenses and capitalexpenses indicate that capital expenditures are improvements that provide a long-term benefit, significantly increase the value of the home, and contribute to extending the useful life of your property.
The Money you will make...Proceeds
Proceeds of Disposition is what you have earned when you sell your capital property. Outlays and Expenses are the costs of selling and these may be deducted from the Proceeds of Disposition. For real estate, Expenses include costs of selling a house such as real estate commissions, lawyer fees and legal fees. If your proceeds of disposition is in a foreign currency, convert the foreign proceeds to Canadian dollars using the Bank of Canada daily exchange rate on the date you sold the capital property.
Capital Gains Inclusion Rate
The capital gains inclusion rate of 50% determines how much of your total capital gains that will be subject to tax. Investments in registered plans such as a Registered Retirement Savings Plan (RRSP), or Tax-Free Savings Account (TFSA) are considered tax-sheltered and capital gains tax will not be charged on investments while they are held in these accounts. The down side with a registered investment account is that you will also not be able to carry forward any capital losses. For more information on registered and non-registered investment accounts, see Capital Gains on Investment Accounts.
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