Published: August 23, 2024
Introduction: Potential Tax Liability When Selling in Canada
2024 has been a difficult year for many property owners in Canada, in light of the high mortgage rates, increased capital gains tax, and the slow real estate market. Many residential property owners, especially those who purchased their properties during the COVID-19 pandemic when the interest rate was low, struggle to keep up with the mortgage payments. The high mortgage interest rate also deters potential buyers from entering the market, despite the new First Home Savings Account program and the 30-year amortized mortgages for first-time home buyers. As a result, there are a historically high number of inventories of real estate property in Canada listed for sale.
For the commercial real estate market, office vacancy rate has been at all time high, most notably in Toronto, Vancouver, and Montreal. The low demand for industrial properties also increased vacancy rates in the industrial market across Canada. Consequently, owners of commercial properties have also been looking to sell or to convert the properties for other purposes.
To help property owners better understand their tax obligations when they dispose of their properties or when deemed disposition of their properties occurs, this series provides a basic guide for Canadian property owners who are subject to various types of taxes. This is Part II of the series, which introduces applicable taxes and rules with regards to the disposition of residential and commercial properties, including Land Transfer Tax, new Capital Gains tax rules, Principal Residence Exemption, Substantial Renovation rules, and rules applicable to situations where deemed disposition of property may occur.
Land Transfer Tax: Tax Imposed On Property Buyers
A Land Transfer Tax is a tax imposed on a property buyer during the purchase and sale process. Not every province levies a Land Transfer Tax but there will always be fees associated with registering property titles. For example, Saskatchewan does not charge Land Transfer Taxes. Instead, Saskatchewan charges a flat land title transfer fee of $25.97 for property valued between $525 and $8,800. For property that is valued at $8,800.01 and higher, Saskatchewan charges 0.3% of the value of the property value. In contrast, Ontario charges a lot more during transfer of property, depending on the type of property, property value, and whether the buyer is a first-time home buyer. Based on the property value, Ontario’s Land Transfer Tax (LTT) is applied on a progressive basis. In addition, if the buyer is a non-resident of Canada, the Non-Resident Speculation Tax may also apply.
Provinces that levy a Land Transfer Tax often provide exemptions and refunds to lessen the tax liability for first-time home buyers. In Ontario, a first-time home buyer can receive up to $4,000 in Land Transfer Tax rebate. The maximum Land Transfer Tax refund available to first-time home buyers in British Columbia, subject to other requirements, is set at $8,000 as of January 1, 2024. Some municipalities also levy a Land Transfer Tax. For example, the City of Toronto imposes the Municipal Land Transfer Tax (MLTT) on any purchases of properties in the City of Toronto, in addition to the Ontario Land Transfer Tax. If you are looking to become a property owner in Canada, particularly in provinces where provincial and/or municipal Land Transfer Tax applies, you should learn more about any existing exemptions and rebate programs before you purchase any properties.
New Capital Gains Tax Rules: Increased Tax Liability For Property Sellers
When a property owner disposes of his or her property, if the sale price exceeds the total amount of allowed expenses and original purchase price, the property owner will have gains from disposition of the property. If the gains are characterized as capital gains, property owners should be aware of the new capital gains rules. The inclusion rate of capital gains in a taxpayer’s income-tax return used to be set at 50%, regardless of the amount of capital gains claimed by a taxpayer. Effective June 25, 2024, the capital gains inclusion rate will be increased from one-half to two-thirds for the capital gains of over $250,000 per year for Canadians, and on all capital gains for corporations and most types of trusts. In other words, Canadian property owners, who receive more than $250,000 in capital gains from disposition of their properties, will need to include 50% of the first $250,000 and two thirds of the remaining capital gains in their income of the year.
Principal Residence Exemption Rules For Residential Properties: Updates Regarding The Property Flipping Rule
The Principal Residence Exemption allows Canadian property owners to pay less (if not available for all years of ownership) or no tax when they dispose of their primary homes. A Canadian taxpayer and his or her spouse may only designate one principal residence per year and the designated property must be “ordinarily inhabited” for part of the year. However, generally speaking, property that exceeds one-half hectare (roughly 1.24 acres) will generally not qualify for the exemption. In addition, a taxpayer must report the disposition and designation of principal residence on his or her income tax return. The Canada Revenue Agency (CRA) may accept late designation and penalties may apply.
Starting January 1, 2023, a new Property Flipping rule became effective. Any gain from disposition of a residential property in Canada, even if the property is the seller’s principal residence, is deemed to be business income and not a capital gain, if the property was owned or held by the seller for less than 365 consecutive days, subject to exceptions. This means that the gains will be 100% included in the seller’s income tax of the year if the seller does not satisfy the 1-year rule or any of the exemption criteria. Moreover, if a loss incurs from the disposition of a flipped property, the seller’s business loss is deemed to be nil. Currently, available exceptions include dispositions of property occurred due to, or in anticipation of one of the following life events:
- The death of the taxpayer or a related person;
- A related person joining the taxpayer’s household or vice versa;
- The breakdown of a marriage or common-law partnership where the taxpayer had been living separate and apart for at least 90 days before the disposition;
- A threat to the personal safety of the taxpayer or a related person;
- A serious disability or illness of the taxpayer or a related person;
- Eligible relocation of a taxpayer;
- Involuntary termination of employment of the taxpayer or the taxpayer’s spouse/common-law partner;
- Insolvency of the taxpayer; or
- The destruction or expropriation of the taxpayer’s property.
Substantial Renovation Rules And The GST/HST New Housing Rebate for Residential Properties
The GST/HST New Housing Rebate is available to individual home buyers who purchase a new home or condo from a builder, or who hires a builder to construct a new house. Individual home buyers can then recover part of the GST/HST paid for the property if the individual home buyers use the property as their principal residence. If an event outside of the individual home buyer’s control occurs and frustrates the individual’s intention to occupy the property, the individual may not be disqualified from claiming the GST/HST New Housing Rebate. Such events may include, but are not limited to, inability to obtain employment and serious illness.
For purpose of the GST/HST New Housing Rebate, substantial renovation of a property can result in the property owner being qualified for the rebate. Generally, 90% or more of the interior of the existing property has to be removed or replaced to qualify as a renovation, which is known as the 90% Test. Only livable areas count towards a substantial renovation, including finished basements and finished attics.
Deemed Disposition Of Property: Potential Tax Liability And Remedies
Deemed Disposition of property may occur in various circumstances. Although for tax purposes, a gain or loss is not recognized until it has been realized by the disposition of the property, the Income Tax Act may consider a legal fiction that a transfer of property has occurred under certain circumstances. A Deemed Disposition then gives rise to a capital gain or loss and the property owner will be liable for paying taxes on the deemed proceeds of disposition. At times, a taxpayer may be able to defer payment of taxes on the deemed proceeds of disposition. For example, an individual taxpayer who is leaving Canada may be able to defer payment of Departure Tax in relation to his or her property, if the taxpayer files an election to defer payment of the Departure Tax and provides adequate security to cover the amount of tax payable, if applicable.
Events that can trigger a Deemed Disposition include change of use in property, immigration and emigration of a taxpayer, death of a taxpayer, gift and certain types of transfers, and the 21-year anniversary of a trust. The timing of a Deemed Disposition may be different, but normally it is either the day a taxpayer has become or ceased to become a Canadian tax resident, the day on which the gift or transfer is completed, the 21st anniversary of a trust, or the day on which the change of use in a property occurs.
Pro Tips – Timing Is Important With Regards To The Disposition Of Your Property
Timing is important when you disposed of your property as taxes and reporting obligations can be affected by the date on which the sale completes. For example, if you have purchased your principal residence for less than a year before you disposed of it, you may be subject to the Property Flipping rule. As a result, you may need to report the gains from disposition of your home as business income, 100% of which will then be included in your income for the year. If the sale completes after you have owned the property for more than 365 consecutive days, you will not be subject to the Property Flipping rule. Any gains will likely be considered capital gains and you may be entitled to claim the Principal Residence Exemption.
Our expert Canadian tax lawyers can advise you on your tax and reporting obligations in relation to the disposition of your Canadian and foreign real estate properties. We recommend that you obtain a legal opinion prior to the closing of the sale, to avoid any unpleased surprises from the CRA.
FAQ
When Do I Need Report Disposition Of My Property To The CRA?
A taxpayer should normally report proceeds from the disposition of his or her property to the CRA in the year when the taxpayer completes the sale. For example, if you sold a rental property in 2024, you should include net proceeds of the sales in your 2024 income-tax return. If you sold a principal residence, you should report the sale of your principal residence as well as declaring the property sold as your principal residence on your 2024 income-tax return. For legal advice specific to your case, including whether you are required to report the sale of a property, please contact one of our expert Canadian tax lawyers.
Can I Defer Tax Payments On Deemed Disposition Of My Property?
It depends on why the deemed disposition occurs. If the deemed disposition of your property occurs in relation to your change of tax residence, you may elect to defer payment of the tax. The election allows you to pay the tax later, without interest, when you actually dispose of the property. However, you may be required to provide security to cover the amount when filing the election. If an individual receives property from his or her spouse as a result of the spouse’s death, he or she can elect for a spousal rollover to avoid realizing any gains or losses with respect to the property.
Disclaimer:
This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.
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