Real estate sales attract a lot of taxes that you must pay to the CRA. You have to be smart in your real estate business to ensure you minimize your taxes and maximize your profits. Most individuals in the real estate business do not know how to reduce their taxes on the sales of real estate in Canada.
This article is designed to inform you on how to reduce your real estate net cost to reduce your real estate tax payable to the CRA. Go through these tips if you own a rental property in Canada and you intend to minimize your annual taxes owed to the CRA when you sell it.
Tips on reducing your taxes on the sale of real estate in Toronto
1. Treat your profit as a capital gain
The easiest way to reduce the amount of tax on real estate is to group your profit on sales as a capital gain. This way, the CRA will only tax 50% of your total profit, thus reducing your taxes significantly. In Canada, the tax authorities only impose the profit gained on the sale of real estate based on this formula:
Final Sale (Net Sale) – Property Cost = Profit
The original buying price of the real estate is treated as the buying price while the net sale is treated as the selling price of the property. The cost of the real estate is duly indicated on your first sale agreement.
2. Asset improvement
If you want to reduce the taxable capital gains on your real estate property, you can do it by making the necessary structural changes on the asset. For instance, you can replace the worn-out roof and install new windows and doors. All the changes on your property are classified under capital improvement. The cost of such changes increases the net cost when calculating the capital gains.
Note that any repairs made on your property are not classified under improvement on your property. Therefore, to reduce the amount of tax on your sales of real estate property, you can improve your property and increase its net value.
3. Avoid a recapture
In Canada, a recapture, or a Capital Cost Allowance is tax-deductible. You should avoid claiming for depreciation allowance when filing your taxes to bypass a recapture. The Canadian Revenue Agency deducts the Capital Cost Allowance attached on your real estate property if you claim for it.
When you opt to sale your real estate property in Canada, you must not forget to factor in the depreciation allowance. However, when you sell the property, do not claim for the depreciation to the revenue agency. Doing so will increase the amount of tax-deductible on your real estate sale.
Reducing the amount of tax-deductible on the sale of your real estate property in Canada involves the three strategies highlighted in this article. If you intend to minimize your taxes, always improve the asset value of your real estate property before you think about selling it to a third party.
Sohail Afzal, CPA, CMA, MBA
Sohail Afzal, (CPA, CMA, MBA) is the founder & CEO of GTA Accounting Professional Corporation. He is a highly experienced Chartered Professional Accountant and businessman himself and understands the challenges that many businesses face when it comes to cash flow management. As an experienced business consultant & tax advisor, he is helping companies grow by providing the technical, financial, and contractual information necessary for strategic decision-making.