If you’re considering selling your rental property, it’s important to understand the tax implications involved. Depending on your circumstances, you could be facing a significant tax bill, so it’s important to plan accordingly. In this blog post, we’ll discuss the tax implications of selling rental property in Canada, with a focus on Toronto and Ontario.

Capital Gains Tax

When you sell a rental property, you’ll likely be subject to capital gains tax. Capital gains tax is calculated based on the difference between the sale price of the property and the original purchase price, plus any expenses incurred during ownership. In Canada, only half of the capital gains are subject to taxation.

For example, let’s say you purchased a rental property in Toronto for $500,000 and sold it for $700,000. You would have a capital gain of $200,000. Since only half of this amount is taxable, you would be subject to capital gains tax on $100,000.

The exact amount of capital gains tax you’ll owe will depend on your tax bracket. In Ontario, the tax rates for capital gains range from 24.76% to 49.53% depending on your income.

Principal Residence Exemption

If you lived in the rental property for any period of time, you may be eligible for the principal residence exemption. This exemption allows you to avoid paying capital gains tax on the portion of the property that was used as your primary residence.

For example, if you lived in the rental property for two out of the ten years you owned it, you could potentially claim the principal residence exemption for 20% of the property. This would reduce the amount of capital gains tax you owe.

It’s important to note that you can only claim the principal residence exemption on one property per year. If you own multiple properties and have lived in more than one of them during the year, you’ll need to choose which property to claim the exemption on.

Recapture of CCA

If you claimed capital cost allowance (CCA) on the rental property, you may also be subject to recapture of CCA. CCA is a tax deduction that allows you to claim depreciation on the property over time. When you sell the property, you’ll need to pay back a portion of the CCA you claimed over the years.

The amount of recaptured CCA you’ll owe will depend on a number of factors, including the original purchase price of the property and the amount of CCA you claimed over the years. It’s important to consult with a tax professional to determine the exact amount of recaptured CCA you’ll owe.

In conclusion, selling a rental property can have significant tax implications. It’s important to understand the capital gains tax, principal residence exemption, and recapture of CCA before you sell. Consulting with a tax professional can help ensure that you’re prepared for any tax liabilities that may arise.