Since 1971, Canadians have been taxed on the gain realized when capital assets – real estate, stocks and mutual funds and other investments – are sold.  There are a few exceptions, and the one we are most familiar with is the sale of a residence.

The sale of a “principal residence” is specifically exempted from tax in the Income Tax Act.  Here are a few things to keep in mind when selling your home or vacation property.

“Principal” does not mean “primary”.  Vacation properties, including those in other countries can qualify, as long as they were not used to earn income.  So a gain on the sale of the Arizona condo or the cottage at the lake can be sheltered from tax as well.

There is a catch – since 1982, each couple can designate only one property as a principal residence.  This designation can be split between properties.  An extra year is added to each calculation to account for the year of a move.

If you own two properties that qualify for the principal residence exemption, it is a good idea to do some tax planning to determine where the exemption should be used.

For example, Mr. and Mrs. Owner bought their home in Red Deer in 1965 for $10,000.  In 1971, which is the first year that Capital Gains were taxed in Canada, it was worth $12,000, and today, it is worth $450,000.  In 1978, they purchased a cottage in the Okanogan for $20,000.  It is now worth $750,000.  They are anticipating selling both properties in 2017 and moving into a condominium.

If they designate the Red Deer property as a principal residence for all years, the taxable income would be:

  Red Deer property BC property
Proceeds on sale $450,000 $750,000
Cost of property (for tax) 12,000 20,000
Gain on sale 438,000 730,000
Sheltered by Principal Residence Exemption 438,000  (all years of ownership)  (Pre 1982 years of ownership:  1978 – 1981 +  1 year )   730,000 x 6/40 = $109,500 
Capital gain for tax 0 620,500

If they designate the BC residence as a principal residence for all years, the result is:

  Red Deer property BC property
Proceeds on sale $450,000 $750,000
Cost of property (for tax) 12,000 20,000
Gain on sale 438,000 730,000
Sheltered by Principal Residence Exemption (Pre 1982 years of ownership:  1971 – 1981 + 1 year )      438,000 x  12/47 = $111,830 730,000  (all years of ownership)
Capital gain for tax 326,170 0

The tax difference, at the highest marginal rate, would be $66,000.

In order to allocate the exemption, you must complete a designation form and submit it to Canada Revenue Agency with your personal tax return.

Starting with the 2016 tax year, Canada Revenue Agency is requiring all individuals to report the sale of a principal residence, even if the gain is completely sheltered by the principal residence exemption.

At Pivotal, we can help you with your tax planning needs and help you maximize your principal residence exemption.

Canada’s tax incentives for charitable donations are designed to encourage support of your favorite charities.   Did you know that in Alberta, the tax credit you receive may result in a refund of over half the contributed amount?

What kinds of donations qualify?

Donations made to Canadian Registered Charities, listed government entities (such as cities or municipalities), certain universities outside of Canada, or a registered museum or cultural organization all qualify for the credit.  Be sure to keep your official donation receipts in case Canada Revenue Agency asks to see them.

Tax Credits

In Alberta, the first $200 you contribute generates a non-refundable tax credit of 25%.  For donations over that amount, you will receive a tax credit of 50%, and, starting in 2016, if your income is over $200,000, the tax credit will rise to 54%. 

If neither you nor your spouse has claimed a charitable donation since 2007, an additional 25% credit on up to $1,000 of donations is allowed against federal taxes payable.

An even more attractive option is to donate securities or other capital properties such as real estate or artwork that have increased in value.  The sale or gifting of these types of property will result in a capital gain, if they have increased in value.  But, if they are donated to a qualified entity, the capital gain will not be included in income.

For example:

Mr. Generous has taxable income of $250,000 and wishes to donate $100,000 to his favorite charity.  He plans on selling investments with an accrued gain of $50,000 to fund the donation.

If he sells the investments and donates the cash, the net result would be:

Tax owing on income of $300,000

(Including $50,000 gain on sale of investments)             $100,000

Federal donation credit                                                     (32,964)

Provincial donation credit                                                 (20,978)

Tax owing                                                                          $46,058

If he donates the shares directly, the result will be:

Tax owing on income of $250,000

(Capital gain of $50,000 is not included in income)          $88,250

Federal donation credit                                                     (32,964)

Provincial donation credit                                                 (20,978)

Tax owing                                                                          $34,308 – difference of $11,750

Income limits and carryforwards

Donations of up to 75% of your net income will qualify for the credit.  The tax credit generated is not refundable, so if it is more than the tax you owe, the donations can be carried forward for five years.

Charitable Giving and Estate Planning

You may wish to leave a portion of your estate to a favorite charity.  The gift may be claimed in the year of death or the preceding year, or, by the estate in the year the donation is made, a prior year, or in the five subsequent years.   This flexibility allows the executor to maximize tax credits on donations.

At Pivotal, we can help you meet your goals of maximizing your estate and supporting your favorite good works!

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With more than 190,000 members, Canada’s accounting professional network is now represented by the Chartered Professional Accountants of Canada (CPA Canada).

The Canadian Institute of Chartered Accountants (CICA) and the Society of Management Accountants of Canada (CMA Canada) established CPA Canada, which in October 2013, signed an agreement to merge with Certified General Accountants of Canada (CGA-Canada). This merge took place on October 1, 2014, integrating the country’s national accounting bodies.

CPA unification: “Chartered Professional Accountant (CPA) is the new Canadian business and accounting designation, bringing together the best of the Certified General Accountants of Alberta (CGA), the Certified Management Accountants of Alberta (CMA) and the Institute of Chartered Accountants of Alberta (ICAA).”