Selling Property? Understand Canada’s Capital Gains Tax

Selling property in Canada comes with its own set of tax rules—and capital gains tax is one you don’t want to overlook. For U.S. expats, understanding how gains from a Canadian home sale are taxed can save you from expensive surprises down the road. Here’s what to know about Canadian capital gains tax, recent rule changes, and how to stay on the right side of both U.S. and Canadian tax authorities.

What are capital gains and how they apply to property in Canada

Let’s start with the basics: a capital gain occurs when you sell a property or investment for more than you paid for it. In Canada, this applies to real estate, stocks, and other investments. The difference between your selling price and your original purchase price (adjusted for certain costs) is your capital gain.

For example, if you bought a condo in Toronto for $400,000 and later sold it for $600,000, your capital gain would be $200,000 (before accounting for eligible expenses like legal fees or realtor commissions). The Canada capital gains tax is then applied to a portion of this gain, not the entire amount.

It’s important to note that not all property sales trigger capital gains tax. The rules differ depending on whether the property was your primary residence, a rental, or an investment. Understanding these distinctions is key to accurate tax planning.

How capital gains tax is calculated on real estate sales

Calculating your capital gains tax in Canada involves a few straightforward steps:

1. Determine your adjusted cost base (ACB): This is generally what you paid for the property, plus certain acquisition costs (like legal fees, land transfer taxes, and major improvements).
2. Calculate the proceeds of disposition: This is the amount you received from the sale, minus selling costs (such as realtor commissions and legal fees).
3. Subtract the ACB and expenses from the proceeds: The result is your capital gain.

Example:

• Purchase price: $400,000
• Legal fees and improvements: $10,000
• Total ACB: $410,000
• Sale price: $600,000
• Realtor commission and legal fees: $20,000
• Net proceeds: $580,000
• Capital gain: $580,000 – $410,000 = $170,000

In Canada, only a portion of your capital gain is taxable. As of 2024, this is generally 50%, with a few caveats. This means if you have a $170,000 gain, $85,000 would be added to your taxable income for the year.

2024 changes to Canadian capital gains tax rates and inclusion rules

The landscape for Canadian capital gains tax shifted in 2024. The federal government announced changes that impacted how much of your capital gain is taxable:

• Inclusion rate increase: For individuals, the inclusion rate (the portion of your gain that is taxable) remains at 50% for the first $250,000 of capital gains realized in a year. However, for gains above $250,000, the inclusion rate rises to 66.67% (two-thirds).
• Effective date: These changes apply to gains realized on or after June 25, 2024.

What does this mean in practice?

If you sell a property and realize a $400,000 capital gain after June 25, 2024:

• The first $250,000: 50% taxable ($125,000)
• The next $150,000: 66.67% taxable ($100,005)
• Total taxable: $225,005

This change is designed to increase tax revenue from higher-value gains, so it’s especially important for those selling investment properties or high-value real estate to plan ahead.

Principal residence exemption and primary home tax benefits

One of the most significant tax breaks in Canada is the principal residence exemption. If the property you’re selling was your primary home for every year you owned it, you may not owe any Canada capital gains tax on the sale.

Key points:

• The exemption applies only to your principal residence (the home where you and your family ordinarily live).
• You must report the sale on your tax return, even if the entire gain is exempt.
• If the property was not your principal residence for the entire period of ownership, only a portion of the gain may be exempt.

Capital gains tax on investment properties and rental real estate

Investment properties and rental real estate are treated differently under Canada’s capital gains tax rules. Unlike your principal residence, these properties do not qualify for the full exemption.

What to expect:

• When you sell a rental or investment property, the capital gain is fully subject to tax at the applicable inclusion rate (50% or 66.67% for gains over $250,000 after June 25, 2024).
• You can deduct eligible expenses, such as capital improvements, from your gain.
• If you claimed depreciation (called “capital cost allowance”) on the property, you may also face a recapture of that depreciation, which is taxed as regular income.

Tax implications for U.S. expats selling Canadian property

If you’re a U.S. expat or a U.S. citizen living abroad, selling Canadian property comes with extra layers of complexity. Here’s what you need to know:

• Canadian tax: You’ll be subject to capital gains tax on the sale, just like any other seller. If you’re a non-resident of Canada at the time of sale, you may face additional withholding requirements (typically 25% of the gross sale price) until you file the appropriate forms and pay any tax due.
• U.S. tax: The U.S. taxes its citizens and green card holders on worldwide income, including capital gains from foreign property. However, you may be able to claim a foreign tax credit for Canadian taxes paid, helping to avoid double taxation.
• Reporting requirements: Both the IRS and the Canada Revenue Agency (CRA) have strict reporting rules. Failing to report the sale properly can lead to penalties.

Ready for expert guidance? Let’s simplify your cross-border tax journey

Selling property in Canada as a U.S. expat can be daunting, but you don’t have to navigate Canada’s capital gains tax maze alone. Our team of cross-border tax experts is here to help you understand your obligations, maximize your exemptions, and ensure you stay compliant on both sides of the border. Take the stress out of your next property sale—get personalized, friendly support from professionals who truly understand expat life.

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