Buying a property or business in Canada? When you eventually sell, you might be faced with a capital gains tax. Many newcomers will become residents of Canada for tax purposes, obtaining a Social Insurance Number (SIN) and filing income taxes with the Canada Revenue Agency (CRA) annually. Here are two key strategies to help reduce your tax bill when it comes to capital gains.
Principal Residence Exemption
In Canada, when you sell a capital asset such as a home, you are generally subject to capital gains tax. This tax is calculated on the difference between the sale price (or market value) and the adjusted cost base (ACB), which is what you initially paid for the asset, adjusted for depreciation and capital expenditures.
However, if the property is your principal residence, and you have lived there for the entire time you owned it, you may qualify for the principal residence exemption. This exemption allows you to avoid paying income tax on any capital gains made from the sale of your home. In other words, provided it has been your primary residence for the duration of ownership, the profit from selling the property will generally be tax-free. Keep in mind that you must declare your principal residence each year on your tax return to qualify.
Lifetime Capital Gains Exemption
Canadian tax law also provides a “lifetime capital gains exemption” for certain types of property. This includes qualified small business corporation shares (QSBCS) and qualified farm or fishing property (QFFP). For 2023, the lifetime capital gains exemption is $971,190.
This means that individuals can reduce their taxable income by half of the exemption amount, which in this case is $485,595. Assuming a 50% marginal tax rate, this can save more than $200,000 in taxes. However, non-residents are not eligible for this exemption. You must be a resident of Canada for tax purposes at the time of the sale or disposition of the property to claim it.
Determining Your Residency Status
To qualify for these tax benefits, it’s essential to understand your tax residency status. The CRA evaluates factors such as the amount of time spent in Canada, whether you own a home in Canada, and other personal and economic ties. Even if you leave the country, certain residential ties may still result in you being considered a factual resident for tax purposes.
Always consult a reputable and experienced tax professional before making any decisions related to these strategies. While tax reduction is legal, tax evasion is not. Ensure you follow all guidelines and avoid falling prey to tax scams.