Capital Gains Taxes on Real Estate in Canada

Canadian real estate that has gained value from the time of purchase to the time of sale is subject to taxation. There are complicated rules concerning whether the real estate is used for business or intended for use in business. This includes such real estate as farmland, inherited property of any type etc. If the property is deemed a business property, it is covered by tax regulation IT-218R.

This article will instead discuss real estate that is considered residential. If one has a second home in Canada, capital gains (net profit after itemized improvements and sales commission etc. is considered as fully taxable income.

One the other hand, if the home is a residence, capital gains are taxed at a reduced rate. If the home is a primary residence, the capital gain is not taxable. This can be a bit complicated as well, depending on the property’s usage over the period of ownership. There is a general principle that if the property “generally occupied by the owner (usually determined by percentage of time), it can be claimed as a primary residence.

Still, since many houses change purpose over a period of years, and such usage changes have an impact on taxation. An example would be a house that was used as a primary residence for part of the period of ownership, and a secondary home for part of the period. Another example would be if the property were rented out part of the time, and owner-occupied part of the time.

The tax treatment in cases such as this is to pro-rate the length of time the property was not a primary residence and that percentage of the gain becomes a capital gain. In Canada, capital gains are taxed at 50% of the gain times the marginal tax rate of the taxpayer’s income level.

Under most circumstances, people owning two homes, one of which is in Canada and the other in the U.S. should compare real estate capital gains treatment in each country and evaluate which home should be declared as primary based on personal or professional opinion.

PLEASE CHECK WITH YOUR TAX ACCOUNTANT FOR MORE INFORMATION. THIS ARTICLE IS FOR INFORMATION PURPOSES AND SHOULD NOT BE RELIED ON IN ANY CIRCUMSTANCE.