A capital gain is realized when you sell a capital asset, such as shares, real estate investment trust units or bonds. It is calculated by taking the proceeds of disposition, less any outlays and expenses of selling.
For rentals, if you’ve claimed depreciation (also called “capital cost allowance”), it may be recaptured upon sale. This amount is added to your taxable income and taxed at 50% of the gain.
Taxes on Capital Gains
When you sell a property or invest in an asset, you may experience a capital gain. The amount of tax you pay on capital gains depends on your income level and your province. For example, in British Columbia, 50% of the value of your capital gains will be added to your taxable income and will be taxed at your marginal rate.
The taxes on capital gains in BC vary depending on your situation, but there are several ways to reduce the tax you owe. One way is to claim the Principal Residence Exemption (PRE) on the sale of your primary residence, which can save you a significant amount in tax.
Another way to lower your tax on capital gains is by claiming the adjusted cost base (ACB) of your investment property. This is the price you paid for the property plus any expenses you incurred to purchase it, such as commissions and legal fees.
However, you should be aware that the CRA can challenge your PRE claim. So, if you want to make the most of this exemption, it’s important to work with an accountant.
There are also a few situations where you may not be required to report a capital gain on your property. The first is if you sell your property for less than its fair market value (FMV) or if you give your investment to someone who isn’t your spouse.
Secondly, if you sell your property for more than its FMV and receive the proceeds of disposition over a number of years, you may be able to claim a reserve on your gain. This reserve can reduce your taxable capital gain for up to four years.
You should also remember that there are tax rules around dividends and interest income. In Canada, you are taxed on your dividend income and interest income at the same rates as other types of income. If you have high levels of dividend or interest income, it’s essential to work with an experienced accountant to ensure you are paying the lowest possible tax.
Exemptions
The sale of a depreciable property can create a capital gain, or a loss. Generally, if you sell a depreciable asset for more than its adjusted cost base and all outlays and expenses incurred to sell the property, you will have a capital gain. If the asset is subject to certain rules on capital cost allowance (CCA), you may also have a recapture of CCA or a terminal loss, depending on the circumstances surrounding the disposition of the asset.
The principal residence exemption – This is an exemption that you can use to reduce the capital gain on the sale of your home or other residential property. It applies to property you own and use as your main residence, or the primary residence of your spouse or common-law partner, for the years you owned it.
However, you may not be able to claim this exemption if you rented your home during the time you were living there. This is because if you rent out your property, you are not using it as your principal residence during the period you were renting it.
In addition, the principal residence exemption does not apply if you transfer your home to someone else in the year of disposition. If you transfer your home to a non-resident, you will have to pay tax on the full value of the property.
You can make a special election to delay reporting your capital gain, recapture of CCA or business income from disposing of a property when you are planning to use the proceeds of the disposition to purchase another property. You must meet specific conditions to qualify for this special election.
Similarly, you can postpone or defer paying tax on any capital gains, recapture of CCA or business income related to the disposition of a property that you have lost because it was expropriated, destroyed or stolen. If you meet the conditions, you can elect to postpone paying tax on the disposition until you replace the property.
The CRA has published several guidelines that you can refer to when considering whether to claim these exemptions. You can find these guides and more information on the CRA website.
Tax Tip: Recapture
Recapture is a tax accounting term that refers to adding back a deduction or credit from a previous year to the income of the current year. Recapture is a common tax issue with a number of nuances and can have a significant impact on the amount you pay in taxes.
When it comes to the IRS, there are many different rules that govern how depreciation recapture and capital gain work. It is important to understand the rules for your situation, so you can plan accordingly.
For example, if you sell an asset that has been depreciated for a long period of time, you may be eligible to make a “realized gain.” This is a much higher tax bracket than the ordinary income bracket, which can be a good thing in some situations.
However, the most important factor when determining your taxable income is not whether you made a realized gain or not, but how long you had it in your possession. This will determine how you report the sale and will affect your depreciation recapture and your capital gains.
You should also consider your cost basis. The cost basis is the total sum of money spent on an asset before you begin to depreciate it. In most cases, you should have a cost segregation study done on your real estate assets before selling them to ensure that the correct depreciation recapture is calculated.
This process will also allow you to claim the most tax-efficient method of transferring your property. This is often known as a 1031 exchange. If you are interested in a property transfer, but are worried about the potential tax implications, a 1031 exchange is an option that could be worth considering.
One last thing to remember when it comes to the depreciation recapture is that it only applies if you sell your property for a net gain. A net gain is when you make a profit from the sale of your property, after subtracting the depreciation and adjusting for other factors like taxes and interest. In some instances, it can be difficult to determine whether you are making a net gain or not, so it is a good idea to consult with an accountant for more details on this topic.
Depreciation
Depreciation is a tax deduction that businesses use to reduce their expenses related to the costs of fixed assets like buildings, machinery and equipment. It also helps to match the cost of an asset to the revenues it generates.
The Canada Revenue Agency sets the depreciation rates for different types of assets. Depending on your company’s needs, you can choose from several methods to calculate your depreciation.
A straight-line method is the most common one. It uses the estimated value of an item at the end of its useful life to determine the depreciation amount you will have to pay each year. You can also calculate depreciation by using the number of years the item will be used.
Another type of depreciation is the units-of-production method. It requires you to record the number of units produced by an asset over its lifespan.
If your business uses equipment and other assets to produce more than a certain number of products, the units-of-production method can help you reduce your expense for that asset. You can also use the sum-of-years-digits method, which lets you calculate depreciation by subtracting a declining fraction of the asset’s depreciable base.
This method can be more complex than the straight-line method, but it’s beneficial for companies that want to recover more of an asset’s value early on in its lifespan. It’s also a good choice for businesses that are not comfortable with the idea of calculating depreciation over a long period of time.
Depreciation is an important accounting and tax consideration for many businesses. It helps to match the cost of an asset to its revenue and allows you to calculate your income more easily. You can also use it to calculate your tax liability when you sell an asset.
Among many other things, David A. Grantham is a contributing author to UmassExtension West Vancouver Blo. He is a renowned expert on real estate in BC.
Born in North Vancouver, Louisiana, Dr. Grantham grew up in Lower Lonsdale. He then went on to complete his business degree at the University British Columbia. As of this writing, Grantham has completed over 100 projects, including the development of a high rise building in Vancouver.
He is a husband, father, son, brother, and friend. He was a dedicated outdoorsman and enjoyed sports such as hunting, fishing, scuba diving, and snow skiing. His wife, Alison Grantham, and their two daughters survived him. He is survived by his wife Alison Martin Grantham and two daughters.