Capital gain tax was introduced by the Canadian government in 1972 with the purpose of financing the social security payments and establishing a more equitable taxation system in the country.
Inclusion rate refers to the amount of capital gains that is subject to taxation. At present, 50 percent of one’s capital gains are subject to taxation in Canada. If your capital gains are $1000, only half of the sum or $500 is taxable.
Canadians are exempted from tax gains under certain circumstances. For example, money from home sales and profits from registered education and registered retirement savings plans are not subject to taxation. Canadian citizens who aim at reducing their capital gains tax have to first determine if they qualify for deductions. Residents of Canada who have been taxpayers during the current tax year are eligible for deductions. In addition, individuals who lease or rent a property in Canada or have resided in the country for at least 183 days are also considered full-time residents. There is a lifetime capital gains exemption in the amount of $750,000 while the deduction for property sale is up to $375,000. In other words, if you sell corporate shares to make a profit, the first $750,000 are received tax-free. Deductions may be claimed on capital gains from dispositions of stocks of small business entities or fishing and farming properties. Unincorporated business entities such as partnerships and sole proprietorships do not qualify for tax exemptions, which is among the major benefits of corporations. Note that the shares of most investment companies don’t qualify for exemption as well.
In order to qualify for deductions, persons should have been Canadian residents at the time of disposition. It is also advisable to determine the amount of capital losses during the taxable year, if any. Subtract all losses for the current tax year from your capital gains and if you get a negative balance, you might have a net capital loss. You may carry forward and deduct capital losses from your capital gains in the next tax years. This information has to be recorded on Form T936.
Cottages and Capital Gain Taxes :
This is a profit from an investment in an asset such as stocks, bonds and Real Estate. The profit being greater than the purchase price. An important issue here is that many families thought this is a tax only for the wealthy. Families that have saved over the years with RRSPs have never had to deal with these gains.
Your principal residence and RRSPs have quietly increased in value over the years. When you start to withdraw from your RRSPs, it is in small amounts only minimizing the tax bite.
Upon the sale or disposal of a significant asset such as your cottage, the tax bite happens all at once! Your family cottage falls under the Real Estate part and is why your family needs to be concerned and explore your options now!
Not planning for this may result in a very nasty surprise from Revenue Canada!
Many years ago when you purchased your cottage you never thought of it as an investment, it was only a treasured retreat for your family. The tremendous tax implications, especially in cottage succession, result in many families to sell their properties to cover the costs of the taxes imposed.
You really should start your succession planning now!
How to Calculate Your Taxes
Inclusion rate refers to the amount of capital gains that is subject to taxation. At present, 50 percent of one’s capital gains are subject to taxation in Canada. If your capital gains are $1000, only half of the sum or $500 is taxable.
Canadians are exempted from tax gains under certain circumstances. For example, money from home sales and profits from registered education and registered retirement savings plans are not subject to taxation. Canadian citizens who aim at reducing their capital gains tax have to first determine if they qualify for deductions. Residents of Canada who have been taxpayers during the current tax year are eligible for deductions. In addition, individuals who lease or rent a property in Canada or have resided in the country for at least 183 days are also considered full-time residents. There is a lifetime capital gains exemption in the amount of $750,000 while the deduction for property sale is up to $375,000. In other words, if you sell corporate shares to make a profit, the first $750,000 are received tax-free. Deductions may be claimed on capital gains from dispositions of stocks of small business entities or fishing and farming properties. Unincorporated business entities such as partnerships and sole proprietorships do not qualify for tax exemptions, which is among the major benefits of corporations. Note that the shares of most investment companies don’t qualify for exemption as well.
In order to qualify for deductions, persons should have been Canadian residents at the time of disposition. It is also advisable to determine the amount of capital losses during the taxable year, if any. Subtract all losses for the current tax year from your capital gains and if you get a negative balance, you might have a net capital loss. You may carry forward and deduct capital losses from your capital gains in the next tax years. This information has to be recorded on Form T936.
Cottages and Capital Gain Taxes :
This is a profit from an investment in an asset such as stocks, bonds and Real Estate. The profit being greater than the purchase price. An important issue here is that many families thought this is a tax only for the wealthy. Families that have saved over the years with RRSPs have never had to deal with these gains.
Your principal residence and RRSPs have quietly increased in value over the years. When you start to withdraw from your RRSPs, it is in small amounts only minimizing the tax bite.
Upon the sale or disposal of a significant asset such as your cottage, the tax bite happens all at once! Your family cottage falls under the Real Estate part and is why your family needs to be concerned and explore your options now!
Not planning for this may result in a very nasty surprise from Revenue Canada!
Many years ago when you purchased your cottage you never thought of it as an investment, it was only a treasured retreat for your family. The tremendous tax implications, especially in cottage succession, result in many families to sell their properties to cover the costs of the taxes imposed.
You really should start your succession planning now!
How to Calculate Your Taxes
- Find out the fair market value of your property. Call a waterfront agent, they should be able to provide an estimate of the value at no charge.
- Determine the adjusted cost base of the property. The price you paid for the property and add on any improvements since you purchased the property.
Properties purchased before 1971 need the value at this date applied, an appraiser can determine this.
NOTE: Was the Tax Exemption taken in 1994?
Example : If you purchased your cottage in 1980 for $150,000. You have put lots of improvements in over the years spending around $100,000. This is the adjusted cost base, $250,000
Your Agent has determined that your property is worth $500,000.
If you now sold your cottage today, or the owner passed away, the resulting Gain would be $500,000-$250,000=$250,000
Next is called the inclusion rate at 50%, meaning you pay taxes on one half of the gain. $250,000 x 50%= $125,000
So by todays laws, the $125,000 would be taxed and at a marginal rate of 40% you would owe $50,000 in taxes!
Can you claim you cottage as your principal residence? If your cottage has gained more in value than your home this is a strategy you may want to consider. As our principal residences are not subject to capital gains taxes it may offer you an opportunity for capital gains tax relief.
There are a variety of options to minimize the impact of these taxes.
In all cases you need to talk with experts familiar with cottage succession strategies.
NOTE: Was the Tax Exemption taken in 1994?
Example : If you purchased your cottage in 1980 for $150,000. You have put lots of improvements in over the years spending around $100,000. This is the adjusted cost base, $250,000
Your Agent has determined that your property is worth $500,000.
If you now sold your cottage today, or the owner passed away, the resulting Gain would be $500,000-$250,000=$250,000
Next is called the inclusion rate at 50%, meaning you pay taxes on one half of the gain. $250,000 x 50%= $125,000
So by todays laws, the $125,000 would be taxed and at a marginal rate of 40% you would owe $50,000 in taxes!
Can you claim you cottage as your principal residence? If your cottage has gained more in value than your home this is a strategy you may want to consider. As our principal residences are not subject to capital gains taxes it may offer you an opportunity for capital gains tax relief.
There are a variety of options to minimize the impact of these taxes.
In all cases you need to talk with experts familiar with cottage succession strategies.
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