Since the introduction of the capital gains tax in 1972, property owners in Canada have often been required to obtain appraisals of their properties for taxation purposes. While the sale of a principal residence is generally exempt from capital gains tax, the sale of an income producing (rental) property is subjected to such taxation.
Even though the gain from property appreciation is not realized until the property is sold, it’s advisable to have a professional appraisal completed at time of conversion to accurately determine the true value of the property. This valuation is critical to determine the proper calculation of capital gains for tax reporting and compliance with CRA regulations.
What are Capital Gains in Canada?
A capital gain refers to the increase in value of any real property, asset, or security since its purchase, with taxes realized upon the sale of the asset. In this article, we focus on real property, which can include investment of rental properties, co-owned properties, or cottages.
For taxation purposes, the Canada Revenue Agency (CRA) requires evidence of the property’s value, which is best provided by a formal appraisal completed by a designated appraiser with the Appraisal Institute of Canada (AIC).
With over 30 years of experience and expertise in this specialized field in the Ottawa and surrounding areas, Dianna brings extensive knowledge to ensure accurate and reliable property appraisals which are accepted by CRA.
Can You Have a Capital Loss?
Yes, indeed. A capital loss occurs when you sell a property for less money than you originally purchased it for. This typically happens if the property was purchased at the peak of the market and then sold during a decline, resulting in the sale price being lower than the original purchase price.
Why Do You Need a Tax Appraisal?
For capital gains tax purposes, a valuation is crucial in establishing the cost base of the property. The Canada Revenue Agency (CRA) requires the true market value of a property for various reasons, primarily geared toward collecting tax revenue. One of the main reasons for valuation revolves around capital gains or losses, which are triggered whenever a property undergoes a change of use or when a property is sold.
Following are some situations which may apply where you will require a professional appraisal:
The property was at one time a ‘principal residence’ (owner occupied) but has been converted to an ‘income (rental) property’. Any change in use will prompt the CRA to request the property’s cost base year value.
An ‘income property’ has been converted to a ‘principal residence’ at some point.
The owner occupied a portion of an ‘income property’ while renting out any other units.
When flipping a property or after major renovations, the cost base year value may need to be re-established.
Selling a co-owned property such as an investment property or a cottage.
Selling an inherited property may require establishing the cost base year value for the year of inheritance.
How is the Property’s Cost Base (Value) Determined?
If the property was initially purchased as an investment (rental) property, the original purchase price typically serves as the cost base for calculating capital gain or loss. However, if the property undergoes a “change in use”, valuation as of the date of change becomes necessary to determine the cost base to accurately calculate the capital gain or loss. For properties owned over an extended period, a retrospective (historical) appraisal may be required.
At DCL Appraisals we have the historical MLS sales datac in the Ottawa and surrounding areas to provide you with an accurate fair market value of your property.
How to determine the rate of capital gains / loss tax when a property is sold?
In Canada, Capital Gains Tax is calculated as 50% of the net gain on the property, which is then taxed at the owner’s marginal tax rate.
For example, if you sell your property and make $100,000 in profit (after deducting any sales related costs, expenses, etc.), you will be required to pay the capital gains tax rate of $50,000 of that profit. It’s important to note that federal taxes must also be included in your calculations.
Furthermore, capital losses can be used to offset capital gains or other income. However, it's always advisable to consult with your accountant for personalized tax advice.
How Does CRA Determine Fair Market Value of Your Property?
What is fair market value? CRA defines fair market value as “the highest price, expressed in terms of money, that a property would bring, in an open and unrestricted market, between a willing buyer and a willing seller who are both knowledgeable, informed and prudent, and who are acting independently of each other”.
To accurately report capital gains and minimize tax liability, it is crucial to work with a professional designated appraiser. Dianna will provide you with an independent, unbiased analysis of your property to ensure the fair market value is accurate when you are reporting to CRA.
Why Do I Need A Professional / Certified Home Appraiser?
In most situations, the Canada Revenue Agency (CRA) will require a professional appraisal of the property as of the applicable date to establish the value for the ‘cost base year’. While, you may consider relying on a real estate agent’s report, it is important to note that this may not be accepted by the CRA.
Hiring a professional designated appraiser can provide you with an accurate fair market value of your property for your tax calculations. The CRA recognizes certified appraisers designated by the Appraisal Institute of Canada (AIC) and their appraisals are typically the only type of valuation document accepted by government entities and the court system.
With full access to both current and historical sales data, Dianna, can provide you with a detailed written report containing a clear explanation of the valuation of your property for taxation purposes.
How Do I Avoid Capital Gains Tax On My Property In Canada?
Some popular strategies for managing capital gains tax in Canada include:
Exemption for principal residences
Making a gift or inherited property your principal residence
Incorporate your rental property business
Utilizing tax shelters for your earnings
Make use of the Capital Gains Reserve
Offsetting capital gains with capital losses
Carrying forward your losses for future use
Furthermore, capital losses can be used to offset capital gains or other income. However, it’s always advisable to consult with your accountant for personalized tax advice.
What's Your Next Step?
Consult your accountant or the Canada Revenue Agency (CRA) for the most up to date tax rules regarding your specific situation is crucial. However, it is equally important to hire a professional designated appraiser. If you are looking for expert capital gains appraisal in Ottawa, look no further.
Hiring, Dianna, owner of DCL Appraisals, you can rest assured that you will be provided with the required knowledge to make well informed real estate decisions. Dianna will provide a fair, unbiased valuation of your property, ensuring an accurate and reliable appraisal report for you to present to CRA.
If you require further information, let us know your questions and Dianna would be happy to help!
Forms & Publications
Guide TR037 - Capital Gains 2023
Schedule 3 – Capital Gains (or Losses)
https://www.canada.ca/en/revenue-agency/services/forms- publications/tax-packages-years/general-income-tax-benefit-package/5000-s3.html
Form T1105 – Supplementary Schedule for Dispositions of Capital Property Acquired Before 1972
Capital gains deduction – Line 25400
