# CRA Capital Gains Question



## itshere (Mar 6, 2017)

Hello - 

From my understanding. If you are a primary residence and you sell your house(making $200K) you dont pay any capital gains and get to keep all the profits. 

However, if you sell your secondary residence and for example sell it 100K more than you bought it for. 50K of that is yours and 50K is your capital gain and that gets taxed at the highest tax bracket. So your total profits would be ~ 75K. 

Now, I'm hearing that as of Jan 2017, that changed and that ALL your profits that you made (100K in this example) is added on to your income for that year and you are taxed at your marginal tax rate. 

can someone please clarify this? 

Thanks!


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## Eclectic12 (Oct 20, 2010)

itshere said:


> ... From my understanding. If you are a primary residence and you sell your house(making $200K) you dont pay any capital gains and get to keep all the profits.


+1 ... the recent change is that prior to 2016, one did not report the sale of a principal residence. As of 2016 and later, one reports the sale of the principal residence on Schedule 3 of one's tax return so that it is recorded as a non-taxable capital gain.
http://www.taxtips.ca/filing/principalresidence.htm

(I haven't looked at the revised Schedule 3 but seem to recall that there is a "principal residence" section that some have written about.)




itshere said:


> ... However, if you sell your secondary residence and for example sell it 100K more than you bought it for. 50K of that is yours and 50K is your capital gain ...


Do you have some sources?

My understanding is that all of the capital gains from the property sale is taxable as a capital gain, see Schedule 3, Section 4 "Real Estate". At the bottom of schedule 3, the sum of capital gains and losses on line 197 is the total capital gain or loss. This is multiplied by 50% so that on line 199, the taxable capital gain has been cut in half (maybe this is the "keep half").

The number from line 199 is transferred to the main return onto line 127 to be included with other income. This is the same as selling publicly traded shares/MF units/REITs etc.


*Edit:*
Just looked at CRA's PDF of Schedule 3 available at http://www.cra-arc.gc.ca/E/pbg/tf/5000-s3/README.html
Where Schedule 3 used to stop at line 199, there is now an additional page for "Primary Residence", including explicitly ticking a box to say the exemption covers all or some, not all or multiple properties.




itshere said:


> ...and that gets taxed at the highest tax bracket.


No ... first off as indicated above, the CG is cut in half before being included in taxable income. (Maybe this is where the "taxed on half, keep half" is coming from?)

The second reason is because taxable capital gains is included in all other sources of income, minus stuff like RRSP deductions that reduce income. 

When the final income number (including the capital gains) is figured out, a graduated system is applied. For most Canadian tax regimes (ex. provinces or territories), the first approximately $40K of income will be taxed at about 20%, the next $5K or so is taxed at about 24% ... etc. 

A poster here on CMF a couple of years ago complained how he/she was paying 45% tax on $100K of income. I plugged in $100K income with the only deduction being the personal exemption (i.e. no RRSP deductions, no charitable donation credits). The tax bill worked out to 30% in total instead of the 45% the *next income dollar earned* would have paid.




itshere said:


> ... Now, I'm hearing that as of Jan 2017, that changed and that ALL your profits that you made (100K in this example) is added on to your income for that year and you are taxed at your marginal tax rate.


No changes I have heard of ... I recall the tax book from two plus decades ago identifying that a real estate capital gain will add to one's income, being taxed across whatever range of tax levels other sources of income has set one at already.

For example, make $25K employment income plus declare $20K gross CG, taxable CG will add $10K ... making the totals $35K so that an Ontario resident will pay 20.05% on the income. Make $100K from employment then declare the same CG gross of $20K, after being reduced by 50%, the taxable CG added will be taxed at 43.41%, assuming no RRSP deductions or credits are affecting the base income the real estate sale is adding income to.
http://www.taxtips.ca/taxrates/on.htm


Cheers


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## Woz (Sep 5, 2013)

There have been rumors that the government will increase the capital gains inclusion rate in the next budget, which may be what you’ve been hearing. However, it hasn’t happened yet so nothing changed Jan 2017, and at this point I’d say it’s fairly speculative. We’ll see in a couple weeks I guess.


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## Eclectic12 (Oct 20, 2010)

^^^

So far, there doesn't seem to be any references to why the rumours are swirling about changes to the CG inclusion rate. 

One columnist indicates that it would consistent with hitting higher income people but also notes it was not part of the election campaign nor are there indications the gov't is studying it. Interestingly, the lack of sources has not stopped the columnist from speculating before the 2016 budget that this change could happen and now before the 2017 budget, to repeat the same talk.

On the flip side, past Canadian gov'ts have had higher inclusion rates that were in the 66% range in 1988 and at 75% for about a decade.


Cheers


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## AltaRed (Jun 8, 2009)

I understand that Morneau asked his 'roundtable' of private sector economists for ideas and an incease in inclusion rate was among them. But mostly it is tax firms who are speculating on it..perhaps looking to drum up business for their firm.

For me, the most 'rationale' I have for an increase this year (or next) comes from this piece about a year ago http://www.alexanderwealth.ca/blog/...signals-on-future-capital-gains-tax-increases It won't happen in an election year, i.e. 2019.


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## Woz (Sep 5, 2013)

I think its affected parties who have decided to pre-empt some of these potential changes and control the messaging. A bit like the donttaxmyhealthbenefits.ca campaign from a couple months ago sponsored by the Canadian Dental Association. Present a potential tax change in the harshest way possible to create public outcry and make it a toxic issue to touch in any way.

I’d be pissed if they increased the inclusion rate to 100%, but there are changes which I’d be more ok with such as having a higher inclusion rate for short term capital gains, having a higher inclusion rate but introducing a lifetime exemption, or having a higher inclusion rate and increasing TFSA contribution room (not holding my breath).


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## OptsyEagle (Nov 29, 2009)

If a taxpayer sells their principal residence and it was jointly owned with their spouse and was jointly paid for with their spouse then would they BOTH list the total proceeds on each of their tax returns or 1/2 the proceeds each? None will be taxable anyway but the schedule 3 really doesn't specify. Anyone have any thoughts on that?


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## Eclectic12 (Oct 20, 2010)

My guess would be each would list half the cost and half the proceeds ... similar to a joint taxable account that was funded on a 50/50 basis.

I'm not sure what the computers would do if the same address was listed on two returns with double the proceeds and half the cost but suspect it might flag some questions. Similarly, doubling it by reported all proceeds and all costs twice may do the same.


BTW, when reading the Tax Tips link on primary residence exemption in post #2 to see if it commented on this situation, I noticed some things.



> Canada Revenue Agency (CRA) can, according to new ITA s. 152(4)(b.3), reassess a taxpayer outside of the normal reassessment period, if the taxpayer does not report a disposition. Normally for individuals the reassessment period is 3 years from the date of the initial notice of assessment, with some exceptions





> If the disposition of the principal residence is reported late, a late-filing penalty can be imposed @ $100 per month x the number of months late, to a maximum of $8,000. New ITA s. 220(3.21) is added to this effect.





> If you fail to report the sale of your principal residence at all, you may be taxed on the capital gain.


I wonder how many are going to get caught because they didn't notice this change?


Cheers


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## Eclectic12 (Oct 20, 2010)

Woz said:


> I think its affected parties who have decided to pre-empt some of these potential changes and control the messaging.


I hope they are effective for the retail types.




Woz said:


> I’d be pissed if they increased the inclusion rate to 100% ...


Then they'd have not only the retail investors upset, the investment industry as well so I doubt they'd go that far with any increases. 




Woz said:


> ... but there are changes which I’d be more ok with such as having a higher inclusion rate for short term capital gains, having a higher inclusion rate but introducing a lifetime exemption, or having a higher inclusion rate and increasing TFSA contribution room (not holding my breath).


I'm not holding my breath either ... but it makes no sense to me that a CEO pulling in $18 million in base salary would also need their large stock options to be at a 50% rate. 

Or how about the penalty for intentionally scamming the TFSA rules have a punitive amount added? As it stands, the top end is 100% of any gains.


Cheers


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## AltaRed (Jun 8, 2009)

I suspect if there is a move in inclusion rate, it will be 75%, where it was circa year 2000.


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## Eclectic12 (Oct 20, 2010)

If it was me that felt it had to be done, I'd go with a few year of 66% then eventually 75%.

Time will tell ...


Cheers


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