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Closing of a Tax Loophole to avoid paying Capital Gains

Homebuyers must now report the sale of a property on their income tax return

Up until now, anyone who sold their principal residence in Canada did not have to report that sale to the Canada Revenue Agency, or the profit earned on that sale. The reason was that the CRA provides a tax exemption on property that is used as your primary home.

As of today, however, the federal government will now require all Canadians tax-filers to report the sale of each and every property sold in the country. As with all assets, taxes are owed. However, if the property is a principal residence it’s still exempt.

“The CRA will audit tax forms,” says Morneau, “to verify that the beneficial owner lives here in Canada and is living in the home in order to claim and receive the Principal Residence tax Exemption (PRE).”

The federal government said the change will ensure that the principal residence exemption is used only by Canadian residents and that families designate just one property as their principal residence in a given year.

There had been widespread abuse of the principal residence exemption by foreign buyers who claimed residency either for themselves or their spouses or children simply in order to avoid paying taxes on real estate sales.

Capital Gains Explained

What is it?

You have a capital gain when you sell, or are considered to have sold, what the Canada Revenue Agency deems “capital property” (including securities in the form of shares and stocks as well as real estate) for more than you paid for it (the adjusted cost base) less any legitimate expenses associated with its sale.

How is it taxed?

Contrary to popular belief, capital gains are not taxed at your marginal tax rate. Only half (50%) of the capital gain on any given sale is taxed all at your marginal tax rate (which varies by province). On a capital gain of $50,000 for instance, only half of that, or $25,000, would be taxable.

For a Canadian in a 35% tax bracket for example, a $25,000 taxable capital gain would result in $8,750 taxes owing. The remaining $41,250 is the investors’ to keep.

The CRA offers step-by-step instructions on how to calculate capital gains.

How to keep more of it for yourself

There are several ways to legally reduce, and in some cases avoid, capital gains tax. Some of the more common exceptions are detailed here:

  • Capital gains can be offset with capital losses from other investments. (In the case you have no taxable capital gains however, a capital loss cannot be claimed against regular income except for some small business corporations.)

  • The sale of your principal residence is not subject to capital gains tax.

  • A donation of securities to a registered charity or private foundation does not trigger a capital gain.

  • If you sell an asset for a capital gain but do not expect to receive the money right away, you may be able to claim a reserve or defer the capital gain until a later time.


Source: Money Sense & Globe and Mail


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