Capital gains tax is a federal government levy that you are required to pay for every profit obtained from the sale of certain types of assets e.g. stock investments and real estate properties. However, this tax does apply to unsold investments or “unrealized capital gains”.
The cost of capital gains tax in Ontario ranged between 7.50% and 26.76% with 26.76% being the capital gains tax rate for the highest income bracket. However, the amount you pay as the capital gains tax depends on the extent to which your asset has grown in value.
Capital gains tax is a tax imposed on an individual’s capital gains or profits from the sale of assets. These assets however aren’t limited to just real estate properties, it includes stocks, bonds, coin collection, and even jewelry. The tax rate is usually influenced by how much you made from the sale, how much money you make per year, and also how long you have owned the particular asset you sold. There are however two types of capital gains that are subject to tax, they include;
- Long-term capital gains – these are gains that come from assets that have been kept for less than a year before being sold. The tax on these properties is usually low.
- Short-term capital gains – these are gains that come from assets that were kept for less than a year before being sold. The percentage for this kind of property is usually higher than that of long-term capital gains.
How Much is Capital Gains Tax in Ontario?
The cost of capital gains tax varies from place to place and is determined by the regulations of the state. For example, in Canada, individuals must pay half of their marginal tax rate on gains made from asset disposal.
The cost of capital gains tax in Ontario is regulated by the Canada Revenue Agency (CRA) and is controlled by the federal government. To however know the amount, you will pay as tax, you will first need to know the following;
- Proceeds of the disposition – this is the actual amount you were paid after selling off the property.
- Adjusted cost base – this is the amount you paid to acquire the property initially. It also includes any additional amount you paid for the maintenance of the property, legal fees, or additional materials gotten to improve the property.
- Outlays and expenses made to sell the property – this includes legal fees, brokers fees, and all additional payments made to sell the property.
- Income tax rate – this is determined by the income tax bracket which you fall into and this is influenced by your filing status e.g. marital status, being the only provider in a household, number of children, etc.
The formula used to calculate your capital gains tax in Ontario is;
PROCEEDS OF DISPOSITION – ADJUSTED COAT RATE = TOTAL CAPITAL GAIN
TOTAL CAPITAL GAIN * 50% INCLUSION RATE = TAXABLE CAPITAL GAIN
TAXABLE CAPITAL GAIN * INCOME TAX RATE = CAPITAL GAIN TAX
This means that your capital gain tax is dependent on your income tax rate. The capital gain tax for the highest income bracket is about 26.76% and it can be as low as 7.50% depending on your income tax bracket.
However, you can be exempted from paying capital gains tax in Ontario if your property meets any of the following;
- The principal residence exemption – your principal residence is the primary home you live in. A vacation home that you own and use primarily with your immediate family may also be deemed your primary home in as much as you don’t make any rental revenue from it. However, you can only claim one how as a primary residence in each calendar year. Whenever you decide to sell this particular property, you will be exempted from paying capital tax gain.
- The lifetime capital gains exemption- you get this exemption when you sell off some particular types of properties. The capital properties eligible for the lifetime capital gains exemption include qualified small businesses corporation shares (QSBCS) and qualified farm or fishing properties (QFFP).
- Exemption on capital gains for donations – you may be excused from paying capital gains tax on capital gains derived from certain assets if you donate them to a registered charity or qualified donees. Some examples of registered donees include registered charities, registered amateur athletic associations, registered municipalities, registered national arts service organizations, registered housing corporations resident in Canada set up to provide low-cost housing for older people, the United Nations and its agencies, universities, registered municipal or public bodies performing a function of government in Canada.
- Capital gains on gifted properties – if you transfer ownership of a property to another person, you will not be required to pay capital gain tax. However, if the person decides to sell off the property, the person will be required to pay the tax fee.
There are however several ways to help you reduce the amount you pay as capital gains tax. They include;
- Use capital losses to offset your capital gains
- When selling your home or property, try to sell it when your income is at its lowest
- Hold your future investments in tax-advantaged accounts
- Make donations of your property to causes you care about
- Transfer ownership of your property to someone in a lower tax bracket
- Use a tax-free savings account
How long do I have to live in a house to avoid capital gain tax in Ontario?
Although the Canada Revenue Agency (CRA) does not specify the exact duration to spend in a house before qualifying for the principal residence exemption, it is important to note that to support your evidence of ownership, you must have owned the property for at least a period of 24 months to 5 years before the date of sale (this is called the ownership test). It is also important to note that properties that have been used to generate income in the space of those years will not be qualified for principal residence exemption.
What Properties Do I need to pay Capital Gains Tax on in Ontario?
Capital gains tax in Ontario applies to only capital assets. Examples are;
- Real estate properties including home, condominium,
- Precious stones
- Collectibles e.g. arts, coins, comic
- Stock vestments