subject: Reinvest Profit in Real Estate Income Tax Canada [print this page] Reinvest Profit in Real Estate Income Tax Canada
According to the Canadian Federal Income Tax Rules, when you sell a real estate property, you will have to pay a tax of up to 48% on the recaptured CCA and up to 24% on any nominal capital gains. The biggest drawback is that the capital gains is not adjusted for inflation which allows any gain to be eaten away by inflation, even before applying the tax. The impact of tax is such that reinvesting into properties of similar values is not possible. Neither do you have the option of deferring payment of tax on the sale or reinvestment of real estate. No wonder, this leads to a lot of economic problems.
There are many groups in Canada who want the existing tax structure to be changed. The Canadian Real Estate Association has advocated that the tax be deferred. Almost all the groups advocate deferment of tax on the sale of a property if the proceeds of that sale are reinvested in a similar property within twelve months. What is being proposed is tax deferral, provided the money earned through the sale of the property is reinvested in a similar value property within twelve months. This in effect would construe an exchange of properties and hence capital gains tax cannot be applied since no capital gain has accrued. Since a lower underappreciated cost will be applied, the taxes received on the income of the reinvested property will be much higher than what can be earned without a deferral.
According to some experts, if you reinvest profit in real estate income tax Canada, the tax deferral on such reinvestment would lead to quite a few benefits. Let us understand what these benefits are.
a) A tax deferral will lead to reduction the overall cost of housing and will make housing more affordable.
b) Will increase the efficiency of capital allocation across the entire industry.
c) This will help in creating an environmental friendly urban redevelopment.
d) It will help the small investors as well as the middle income groups.
e) This will help in promoting housing development more quickly than by providing any kind of construction subsidies.
Now, let us understand how investing in real estate in Canada affects your income tax. Under the Canadian laws, any gain on sale of real estate property is a capital gain unless you have purchased the property with sole intention of making a profit. When you invest with the intention of making a profit, it becomes a business transaction and hence will be taxed accordingly. Currently, the entire profit or loss, if any is fully taxable. If the transaction comes under capital gains, then you will be taxed only on 50% of your gains.
There are certain exemptions under capital gains if you are reinvesting on real estate in Canada. If the said capital gain arises out of your principal residence, then you are fully exempt from any kind of taxation under the principal residence exemption clause. However, you need to claim this exemption by filling out the necessary documents along with the tax returns for the year your property has been sold.
Though there are no official guidelines on how many times you can buy or construct, reside and then sell a house, the Canada Revenue Authority or the CRA may look at the frequency with which you buy and sell the property. Further, they may also try to figure out whether you are buying and selling property solely with the intention of making a profit or not. If the CRA feels that your intent was to earn profits from the sale of real estate property, then the entire profit amount will be taxed. So, it is very important to understand the various interpretations on reinvestment profits in real estate property.
