How it works: Capital gains tax on the sale of a property

This above is a simple-math calculation of the capital gain. But, also can dive even deeper to reduce the amount of capital gains you would claim on your tax return (more on that below).

So, it’s not that capital gains are taxed at a rate of 50%, but it’s that 50% of the capital gains are taxable. And the capital gains tax rate depends on the amount of your income. You add the capital gain to your income for the year, including money you receive from your job, side hustles, dividends in non-registered accounts, any selling of assets and so on. 

Capital gains are taxed as part of your income on your personal tax return. Below are the federal tax brackets for 2022, which can give you an idea of how much tax you may owe for the year. You will need to figure out the provincial tax bracket rate for your province or territory, too. Since Canada has a tiered tax system, you will have to do a bit of math to estimate your annual income tax, breaking down your total tax into the brackets, and the amount owed for each bracket.

And, of course, to really get down to the nickel of how much you ultimately owe, you will need to do your tax return and receive a notice of assessment. 

Annual Income (Taxable) Tax Brackets Tax Rates Maximum Taxes Per Bracket Maximum Total Tax
Up to $50,197 The first $50,197 15% $7,529.55 $7,529.55
$50,197 to $100,392 The next $50,195 20.5% $10,289.98 $17,819.53 ($7,529.55 + $10,289.98)
$100,392 to $155,625 The next $55,233 26% $14,360.58 $32,180.11 ($17,819.53 + $14,360.58
$155,625 to $221,708 The next $66,083 29% $19,164.07 $51,344.18 ($32,180.11 + $19,164.07)
Over $221,708 Over $221,708 33% n/a n/a

It’s worth noting that there can be other factors for calculating capital gains. Here are some articles that delve deeper into some of these specific situations.

Can you avoid capital gains tax?

It’s not so much that you can avoid capital gains tax, but that there are CRA rules that you can take advantage of to reduce the amount you may owe. Here are a few: 

Principal residence exemption

First is the principal residence exemption. You don’t pay tax on the sale of your home, but you may have to for a secondary property or residence, and/or investment property. According to the CRA, a property is exempt from capital gains tax if your situation meets these four criteria:

  • “It is a housing unit, a leasehold interest in a housing unit, or a share of the capital stock of a co-operative housing corporation you acquire only to get the right to inhabit a housing unit owned by that corporation.
  • “You own the property alone or jointly with another person.
  • “You, your current or former spouse or common-law partner, or any of your children lived in it at some time during the year.
  • “You designate the property as your principal residence.”

Accounting for outlays and expenses

There is also accounting for outlays and expenses. From your capital gain, you can subtract the costs necessary for selling the property, such as renovations and maintenance expenses, finders’ fees, commissions, brokers’ fees, surveyors’ fees, legal fees, transfer taxes and advertising costs.

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