Navigating the world of real estate taxes in Canada can be complex, whether you’re buying, selling, renting, or investing in property. From understanding capital gains tax to knowing what deductions are available for rental income, staying informed is key to reducing your tax burden and ensuring compliance with the Canada Revenue Agency (CRA).

In this blog post, we’ll explain the major tax implications of real estate transactions, investment properties, and homeownership in Canada.

1. Taxes on Selling a Property

When you sell a property in Canada, you may be subject to capital gains tax on any profit made from the sale. Here’s what you need to know:

Capital Gains Tax

• Capital Gain = Selling Price – Adjusted Cost Base (ACB) – Expenses (legal fees, commissions, etc.)
• New Rules Effective June 25, 2024:
  • The first $250,000 of net capital gains in a taxation year are taxed at the existing 50% inclusion rate.
  • Any capital gains above $250,000 will now be taxed at a 66.67% inclusion rate.

Example:

If you sell a property with a capital gain of $300,000:

• The first $250,000 is taxed at the 50% inclusion rate, resulting in $125,000 of taxable gains.
• The remaining $50,000 is taxed at the 66.67% inclusion rate, resulting in approximately $33,335 of taxable gains.

In total, $158,335 will be included in your taxable income.

Principal Residence Exemption (PRE)

If the property was your principal residence for every year you owned it, you may be eligible for the Principal Residence Exemption (PRE), which can exempt you from capital gains tax.

Key Conditions for the PRE:

• The property was ordinarily inhabited by you, your spouse, or your dependents.
• You designated the property as your principal residence.

Example: If you sell your primary home for a $200,000 profit, the entire amount is tax-free under the PRE.

Rental or Investment Properties

If the property was used for rental or investment purposes, capital gains tax applies. The property does not qualify for the Principal Residence Exemption unless you officially changed its use.

2. Taxes on Rental Income

If you earn rental income from a property, you must report it on your personal or corporate tax return.

What to Report

• Gross rental income (total rent received)
• Deductible expenses (see below)
• Net rental income (taxable amount)

Deductible Expenses for Rental Properties

You can deduct expenses incurred to earn rental income, including:

• Mortgage interest (not the principal)
• Property taxes
• Utilities (if paid by you)
• Insurance
• Repairs and maintenance
• Property management fees
• Advertising costs
• Capital Cost Allowance (CCA) for depreciation of the property

Example:

If you earned $20,000 in rental income and had $12,000 in expenses, you only pay tax on the net $8,000.

3. GST/HST on Real Estate

Newly Built Homes

If you’re buying a newly built or substantially renovated home, you may need to pay GST/HST. However, you could qualify for a GST/HST New Housing Rebate if:

• The home is your primary residence.
• You meet specific eligibility conditions.

Rental Properties

If you purchase a property and intend to rent it long-term, GST/HST generally does not apply to the rent. However, short-term rentals (e.g., Airbnb) may be subject to GST/HST if annual revenues exceed $30,000.

4. Flipping Properties: Business Income vs. Capital Gains

If you’re involved in house flipping (buying, renovating, and reselling for profit), the CRA may classify the income as business income rather than a capital gain.

Key Differences:

• Business Income: 100% of the profit is taxable.
• Capital Gains: Only 50% of the profit is taxable (up to $250,000; higher rates apply thereafter).

Factors Considered by the CRA:

• Frequency of sales (are you flipping multiple properties?)
• Your intention (resell quickly vs. long-term investment)
• Your profession (builders, contractors, etc.)

5. Taxes on Foreign-Owned Real Estate in Canada

If you’re a non-resident who owns property in Canada, you are still subject to Canadian taxes on:

• Rental Income: A withholding tax of 25% applies to gross rental income, unless you file a tax return and elect to pay tax on net income.
• Property Sales: A 25% withholding tax applies to the gross sales price unless you obtain a clearance certificate to adjust for actual taxable gains.

6. Real Estate Tax Deductions for Homeowners

While personal homeowners don’t have as many tax advantages as landlords, there are still key deductions and credits to consider:

Home Buyers’ Plan (HBP)

• Withdraw up to $35,000 from your RRSP tax-free to buy or build your first home.

First-Time Home Buyers’ Tax Credit

• Claim a $10,000 non-refundable tax credit (worth up to $1,500 in savings) when you buy your first home.

Home Accessibility Tax Credit (HATC)

• Deduct up to $20,000 for renovations to make a home more accessible for seniors or persons with disabilities.

7. Planning for Real Estate Taxes

Proper tax planning can save you thousands of dollars when buying, selling, or renting real estate. Here are some tips:

• Keep detailed records of all property-related expenses.
• Work with a tax professional to determine if a rental property or flipping income qualifies as business income or capital gains.
• If you’re selling, understand how the Principal Residence Exemption and new capital gains rules apply.

Why Work with a Real Estate Tax Professional?

Real estate tax rules in Canada are complex and frequently change. A tax professional can help you:

• Minimize Taxes: Ensure you’re claiming all eligible deductions and exemptions.
• Stay Compliant: Report income, capital gains, and GST/HST accurately.
• Plan Ahead: Make strategic decisions for real estate investments and sales.

Conclusion

Whether you’re buying, selling, or investing in real estate, understanding your tax obligations is crucial. With new capital gains rules coming into effect, staying compliant with the CRA while maximizing deductions is key to managing your tax bill.

If you need expert advice on real estate taxes, contact us today! Our team of experienced accountants specializes in helping individuals and investors navigate the complexities of real estate tax in Canada.