Assuming you could have one other house that you simply live in, Charles, there are tax implications for selling either of your two properties. You can actually claim the primary residence exemption in your holiday home, which makes the sale tax-free indefinitely. But I think the capital gain on your home could be higher and it will be higher to exempt it from capital gains tax as a primary residence.
Is there an exemption from capital gains tax?
I assume you aren’t aware of the $100,000 lifetime capital gains tax exemption that existed in Canada from 1984 to 1994. During that point, each spouse could have as much as $100,000 in lifetime capital gains tax-free. Some Canadians reported a notional capital gain on their 1994 income tax return, inflating the tax cost of certain investments – including their vacation homes – based available on the market value on the time. You should check this, because it would scale back the ultimate capital gain upon a sale.
However, there may be currently no $200,000 capital gains tax exemption, Charles. And that $100,000 capital gains tax exemption can not be claimed, so you can not make a retroactive election. The only capital gains tax exemptions currently in place relate to the sale of interests in private businesses or eligible agricultural or fishing property. Those exemptions will likely be $1.25 million per spouse starting June 25, 2024, with a further $2 million Canada Entrepreneur Incentive phased in over 10 years between 2025 and 2034.
How to cut back capital gains to cut back taxes when selling a vacation home
With a value of $10,000 and a market value of $120,000, the present capital gain is $110,000. Taxable capital expenditures or renovations through the years could be added to the associated fee. Selling expenses akin to brokerage commissions and legal fees could be deducted from the proceeds. If we assume a net capital gain of $100,000 after transaction costs, $50,000 – or half – is taxable within the 12 months of sale. If a taxpayer’s capital gains exceed $250,000 in a single 12 months, the next two-thirds tax rate (66.67%) applies to the surplus.
If you might be in a 20% marginal tax bracket, I’ll assume for discussion purposes that your income is $30,000 and also you live in Ontario, Charles. The $50,000 taxable capital gain could be split between you and your wife – $25,000 each. So your taxable income could be $55,000, with a brand new marginal tax bracket of about 24% and a mean tax rate of about 15%. Depending in your income sources and tax credits, you would each must pay about $5,000 in income tax upon sale.
In Canada, should you own two properties at any given time, you could have a taxable capital gain unless one in all them has declined in value in comparison with the unique purchase price. An exception may apply for a farm or fishing property, but certain criteria apply. Income inclusion is somewhat reduced because only half of a capital gain is taxable unless your annual capital gains exceed $250,000. It is essential to plan for the long run taxation of all of your property – whether upon sale or death.
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