3 Ways to Lower Canadian Taxes on Capital Gains!

August 30, 2024

Ishita Soni

How to Reduce Canadian Taxes on Capital Gains.

Many newcomers will be considered Canadian residents for tax purposes. They will have a Social Insurance Number (SIN) and need to file taxes with the Canada Revenue Agency (CRA) each year.

Keep reading to find out about key capital gains tax exemptions that can help newcomers lower their tax bills.

Tax Break for Selling Your Home in Canada

When you sell a capital asset, such as a home, you usually need to pay taxes on the profit, known as a capital gain. Specifically, the gain is calculated as the difference between what you sold the asset for and what you initially paid for it. For instance, if you bought a business for $50,000 and later sold it for $250,000, you’d have a capital gain of $200,000. Consequently, with the current 50% inclusion rate, you would be taxed on $100,000 of this gain. If your tax rate is 50%, your tax bill would amount to $50,000.

However, there is an important exception: if you sell your principal residence (your main home) and it has been your home for the entire period of ownership, you typically won’t owe any taxes on the gain. In other words, as long as you’ve lived in the home throughout the time you owned it and qualify for the exemption, any profit from its sale will generally be tax-free. To benefit from this, you must declare the property as your principal residence on your annual tax return.

Lifetime Capital Gains Exemption in Canada

Canadian tax law provides a ‘lifetime capital gains exemption’ for profits from selling certain types of property. Specifically, this includes:

• Shares in a small business corporation
• Farm or fishing property
• Related reserves and trusts

Each individual can benefit from this exemption, provided they meet the qualifications.

For 2023, the exemption amount is $971,190. Therefore, if you use the full exemption, you can reduce your taxable income by $485,595 (which is half of the exemption amount). Consequently, if you’re in the 50% tax bracket, this could save you over $200,000 in taxes.

How do you avoid capital gains tax on rental property in Canada?

If you’re planning to sell rental property in Canada, you can’t avoid paying capital gains tax on 50% of the profit. However, timing your sale can be beneficial. If you’re close to the end of the tax year, consider postponing the sale until after the new year. This way, you can delay recognizing the capital gain and push the tax payment to the next year.

On the other hand, if your income varies, you might not want to wait. Selling in a year when your income is lower could mean you pay less tax on the capital gains because of a lower tax rate. Another strategy is to offset the gain from the property by selling another asset at a loss in the same year. This can reduce or even cancel out the tax you owe on the capital gains.”

How to Determine If You’re a Canadian Tax Resident

The CRA looks at several factors to decide if you’re a Canadian tax resident, including:

• How much time you spend in Canada
• Whether you have a home in Canada
• Whether you have a spouse, common-law partner, or dependents in Canada
• Personal property you own in Canada
• Economic connections to Canada
• Health insurance coverage in Canada
• Canadian government ID

This list isn’t complete. Even if you leave Canada, you might still be considered a Canadian resident if you keep strong ties to the country.

Protect Yourself from Tax Scams

Be especially cautious if someone approaches you with offers to help you avoid paying income taxes. While tax reduction strategies are legal and based on current laws, tax avoidance or evasion is illegal. Unfortunately, scams promising to reduce your taxes are common. Always consult with a reputable tax professional before making any decisions.

Get In Touch