Capital Gains Tax in Ontario: A Guide for Real Estate Investors
What is Capital Gains Tax?
Capital gains tax is a tax on the profit you make when you sell an asset, such as real estate. The profit is calculated by subtracting the adjusted cost base (ACB) of the asset from the proceeds of the sale.
Capital Gains Tax Rates in Ontario
The capital gains tax rate in Ontario for the highest income bracket is 26.76%. This means that if you earn $2,000 in total capital gains, you will pay $535.20 in capital gains tax.
When is Capital Gains Tax Payable?
Capital gains tax is payable on the sale of property that is considered to be a capital property. This includes:
- Rental properties
- Vacation homes
- Land
- Stocks and bonds
You do not have to pay capital gains tax on the sale of your principal residence.
How to Calculate Capital Gains Tax
To calculate your capital gains tax, you will need to know the following three amounts:
- The adjusted cost base (ACB) of the asset
- The proceeds of the sale
- Your marginal tax rate
Once you have this information, you can use the following formula to calculate your capital gains tax:
Capital gains tax = (Proceeds of sale - ACB) x Marginal tax rate
Example
Let's say you sell a rental property for $200,000. You purchased the property for $150,000 and have made $20,000 in capital improvements. Your ACB is therefore $170,000.
Your capital gain is $30,000 ($200,000 - $170,000). If your marginal tax rate is 26.76%, your capital gains tax will be $8,028.
Tips for Reducing Capital Gains Tax
There are a number of things you can do to reduce your capital gains tax liability, including:
- Hold your assets for a long time. The longer you hold an asset, the lower your capital gains tax rate will be.
- Make capital improvements to your property. This will increase your ACB and reduce your capital gain.
- Use the principal residence exemption. This exemption allows you to sell your principal residence tax-free.
- Donate your property to charity. You will receive a tax receipt for the fair market value of the property, which can be used to reduce your capital gains tax liability.
Conclusion
Capital gains tax is a significant consideration for real estate investors. By understanding the rules and taking steps to reduce your tax liability, you can maximize your investment returns.
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