How To Avoid Capital Gains Tax on Property in Ontario?

a hand is holding a magnifying glass over a bag with the word capital written on it

With changing real estate and capital gains tax laws, many investors are finding it difficult to make profit on their sales. This tax only applies to investment properties. In Ontario, 50% of your sale earnings is taxable, which means you’ll have to report it as income when filing taxes. As a Brampton realtor, I don’t support not paying capital gains tax. Instead, I’ve compiled a list that can help you pay lower taxes and keep more profit. Let’s talk about them..

1. Principal Residence Exemption

According to Canadian real estate laws, the property is considered a principal residence if you or a family member occupied it for at least a year before selling. If you live in this property for a few years but owned for several more, you are exempt for the years it was occupied by you or a family member. 

2. Use the Adjusted Cost Base

Adjusted Cost Base is the original purchase price plus any costs related to acquiring and improving the property. Keep receipts of all expenses incurred as you will need to submit them as proof. These expenses can include closing costs, renovation, repair, legal fees, property taxes, landscaping, HVAC installations, car garage repairs, and insulation. 

3. Capital Gains Reserve

 If you receive payment for your property over multiple years, you can claim a reserve and only pay tax on the portion received each year. You can only create a reserve if you’re a resident of Canada and file taxes every year. You cannot sell the property to a corporation that you own. 

hand holding blocks with RRSP written on it

4. Invest in Tax-Deferred Accounts

Registered Retirement Savings Plan (RRSP) or a Tax-Free Savings Account (TFSA) are two accounts that you can use to defer capital gains tax. While the direct investment of property profits into these accounts isn’t allowed, you can sell investments within these accounts to free up funds for property purchases. Any capital gains within these accounts are either tax-deferred (RRSP) or tax-free (TFSA).

5. Inheritance and Gifts

You may choose to gift the property to your spouse or common-law partner, so you can defer paying taxes until they sell the property. Consult with your tax consultant and financial planner to work out a process that saves the most.

6. Sell When Your Salary Is The Lowest 

If you sell the investment property when you’re not making a good salary, your total taxable income will be low. You might even get some back in refunds. This doesn’t happen often but there are circumstances like – parental leave, loss of income, or leaving a job for caretaking responsibilities, which can lower your income. A tax consultant will guide you through this process.

7. Lifetime Capital Gains Exemption

Some properties are exempt from capital gains tax. The profit is usually capped and applies only to farm or fishing properties. In 2022, it was capped at $913,630 and usually sits around $1 Million. 

First-time real estate investors should consult with tax professionals, keep detailed records, stay informed about tax laws, and strategically plan their property sales. For more real estate investor advice, follow Realtor Catherine Nacar.

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