Capital Gain or Income ? [ Part 1 ]
What triggers and defines capital gain versus income for tax consequences?
“The Income Tax Act does not specifically set out whether or not a gain or loss is capital in nature.
The taxpayer is responsible for reporting the gain (profit)as income or capital gain. This report may
then be challenged by the Canada Revenue Agency (CRA) with the onus of proof on the taxpayer.
Over the years, the determination has been made based on a number of factors such as the intention of the taxpayer,
relationship to the taxpayer’s business, number and frequency of transactions, length of time held, nature of the transaction
and objects of the corporation.
Should a debate proceed (between the taxpayer and CRA) to the Tax Court of Canada, the Court will
consider relevant factors concerning taxpayer conduct before, during and after the period under appeal.”
[ source OREA College text material REIA course pages 275-276, Required Reading ] (tax expert required here)
Why would the Canadian taxpayer want their gain (profits) from a sale be considered a capital gain?
With a capital gain, the taxes determine and payable would be half versus income that’s the reason.
We are lucky today, in that there is a lot of information online for inquiring minds, however care must be exercised that you are reading the correct and most applicable information to you. Unless you are really specific in your search via Google, most results will yield information that is relevant to American investments and corresponding tax laws, rules, guidelines, rates and practices and are different for us Canadians.
As these tax laws, rules and guidelines potentially change with ever government budget, finance statement or policy direction from either federal or provincial governments of the day a tax professional must be consulted in order to deal with the latest and most relevant information to the client and their unique situation. There’s your cautionary note, now we can try to explore this concept of Capital Gains or Income from a high level.
When a sale or implied disposition of an asset occurs it has potential tax implications.
We will stay with simple real estate examples here that deals with actual sale of 100% of an asset.
An investor purchases a commercial property with plans to hold for the long term and collect rental income from the property over their twenty year tenure of ownership.
One day after many years of being a landlord of this commercial income property investor decides to retire from active ownership and sells 100% of the property.
The marketplace enthusiastically welcomes the sale with a market high price and the investor makes a before tax profit after all associated costs and tax eligible adjustments (ie CCA, Recapture, etc) of one million dollars ($1,000,000) that is declared as their capital gain, having meet all the requirements according to their tax advisor accountant.
In a word the investor’s before tax “Profit” is $1,000,000, their gain.
How that profit is dealt with is the discussion that follows in this fictional example.
In short the current regulations (always subject to change and it has changed from time to time) permits a rate of 50% to be applied to this capital gain amount resulting in a taxable capital gain of half the amount.
Therefore ; take the above $1,000,000 if /when defined as a capital gain and apply 50% capital gains tax rate = $500,000 shall be the taxable amount. NOT the taxes due.
The resulting (remaining) $500,000 is the taxable capital gain, meaning this amount will be taxed at the investor’s maximum marginal tax rate (but the amount of tax the investor will pay depends on their total income for their tax filing period). For our example here let’s assume this investor has no other taxable income, so only the $500,000 will be taxed.
Therefore, $500,000 becomes tax free and the other half of the profit (gain) is determined to be the taxable capital gain $500,000 upon which the investor will pay taxes at the prescribed tax rate.
Let’s also suggest this investor is an Ontario resident, therefore $500,000 x tax rate (53.53% combined federal and provincial on 2023 marginal tax rates, note this is the highest rate it is progressive lower for lesser amounts) = $267,650 Taxes due and payable.
Or
Take the $1,000,000 before tax profit defined as capital gain and apply 26.76% for 2023 Taxable Income over $235,675, resulting in taxes due of $267,600 approximately.
Before any surtax that the taxable income may attract. [ source for marginal tax rates in Ontario Canada ; www.taxtips.ca , also www.canada.ca (search income tax) ]
To be continued … Part 2 : Capital Gains Taxed (Exemptions / Capital Loss / Operations Cash Flows … )
In the meanwhile if you have questions kindly email them to us at capitalmoves@gmail.com and we will make an effort to answer them from a lay person’s perspective where tax information is concerned, we are not tax professional and therefore will not provide any tax advice (for tax advice consult a CPA or tax expert) however we are professional realtors and know where to find the answers to any real estate related questions.
The above article is meant to be for educational discussion – information and is not intended to give
Financial, legal, tax, engineering, environmental advice. A tax expert should be consulted when appropriate.
Please use the appropriate experts before investing your hard earned money.
All investments have risk and risk of capital loss is possible.
Envoy Capitol Realty Inc., Brokerage Toronto, Canada. (416) 441-6163
Email : capitalmoves@gmail.com
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Reach out and let’s start a conversation how we can help you and your clients get to the next level
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