Canadian Capital Gains Taxation at a glance
Louis J. Sapi, CA, MBA
Hinchcliffe Sapi LLP
Before 1972 there was no tax on capital gains in Canada. Late in the sixties the Canadian
government set a royal commission on taxation lead by Kenneth Carter. The Carter
Commission report recommended a tax on all capital gains. In 1972 Finance Minister
Edgar Benson introduced a partial tax on capital gains of selective properties and
specifically excluded a tax on the sale of “principal residences”. The introduction of
selective capital gains tax regime resulted in the end of provincial and federal estate
succession taxes between 1971 and 19802.
Over the past 33 years the capital gains tax regime changed capital gains exclusions rates
from 50% of the capital tax-free to 33% free to 25% free then back to 50% tax free.
Principal Residence Disposition remains tax free with few exceptions
In 1982 the tax-free status of a second principal residence that may have been a cottage
owned by the other spouse was taxable for the period of time owned after 1981.
One designated principal residence can be sold tax free at any one time. In other words, a
married couple that owns a cottage and city home could not dispose of both and claim the
principal residence tax free exemption for both properties during the same period. One of
the properties would need to be designated as the principal residence during whole or part
of the term of ownership since 1981.
I lived in my home for 10 years then rented it out for 3 years while renting another place
that I occupied as a principal residence, what would be the tax consequences if I now
decide to sell my home?
If you move from your home, rent it out and then decide to sell after several years the tax
rules permit you to designate your home as a principal residence four years after a change
of use. You need to write the Minister of Revenue a letter to “elect” to designate your
home as a principal residence at change of use and you must not claim any capital cost
allowance or depreciation on the home while rented during the election period. The same
rule would apply if you bought another home. In that case the first four years of the new
home would not be designated a “principal residence” if you elected your former
residence (rental) property as your principal residence for those same years. You and
your significant other – common law or same sex partner, can not own two principal
residences for tax purposes for any given period of time after 1981.
1 The information provided is for general purposes only. It does not replace professional advice and is not
intended to provide a professional opinion or advice for a specific tax issue. Please speak to professional
tax and legal advisers to assess your particular situation and needs.
2 The probate fee for administering the settlement of an estate is distinguished from estate succession tax as
the former is voluntary while the latter was mandatory.
The bottom line is to seek the advice of a professional to optimize your tax benefits if you
own more than one principal residence during the same period.
I have a family cottage that I inherited while I owned a principal residence. The cottage
has sky-rocketed in value since I got it and now I want to sell. Do I need to pay tax on
this property and, if so, how much?
The cottage property was inherited at its fair market value at the time of title registration
in your name. If you renovated the cottage additional costs would be added to the fair
market value at inheritance. The cottage value and costs of renovation would be the tax
cost of the cottage for purposes of capital gains tax. In certain circumstances you may
also add property taxes paid for the cottage. The proceeds you receive are reduced by the
legal fees/disbursements and sales commission to the real estate agent, if any, and the tax
cost of the property. Fifty percent of the capital gain is included in your income and
taxed at your marginal tax rate. Seek the advice of a tax adviser to inform you of the net
after tax. result before you sell.
What if I move back in the cottage? How long would I need to wait before I could sell it
as my principal residence tax free?
It does not matter if you move back in. The tax rule requires you to allocate the number
of years that you held the cottage as your principal residence. Remember that only one
principal residence can be owned after 1981. If you own two residences during the same
or part of the time you will need to prorate the capital gain on the sales of each residence
to the extent the residence sold was designated your ‘tax free’ principal residence. It
requires some calculations best done by those who are well versed in the tax rules.
I want to buy properties, rent them out and have the tenants pay the mortgage and
expenses and write-off net rental losses against my other income. Is there any tax
problem with this plan?
The properties need to be available for rent during the tax period. The tenants should be
paying rents at prevailing market rates: children or relative tenants renting at discounted
rates would increase net loss and raise a flag with tax authorities. You must add the costs
of renovation to the value of the building during the period the rental unit is not available
for rent. You may reduce rental profit by the capital cost allowed for that particular
property, excluding the value of the land. You can not increase a net rental loss by capital
cost allowance. Mortgage interest, not mortgage principal, would be tax deductible
expense. Net rental losses would be deducted against other income.
I want to give my home to my son and his wife. What are the tax issues?
If you give your home to your child there would be a deemed disposition and capital
gains tax would accrue only to the extent that the property was not your principal
residence. You determine this by counting the years you claim the donated property as
your principal residence plus 1 year and divide this number by the total number of years
you owned a principal residence. The prorated gain, if any, would be included in your
taxable income at the current inclusion rate of 50% and taxed at you marginal tax rate.
You should discuss with a family law lawyer the issues that may arise under family law
that could result in the donated residence being attached by your former daughter or son
in-law upon dissolution of your child’s marriage. A similar issue arises if you child is
spend-thrift or possibly insolvent and subject to creditors who may attach liens on the
property that you donated. In this case, transferring the property to a family trust may
prove wise. You tax and legal adviser may help you to decide on the means and ways to
gift property to your children to avoid unexpected disappointment.