Capital gain tax on sale of income property
Let’s use an example to illustrate.
Say you purchase a property for $250,000, and you sell it for $350,000 and assuming the property is buy and hold.
Capital gain = $350,000 – $250,000 = $100,000.
In Canada, only 50% of capital gain is taxable, hence 50% of $100,000 is taxable = $50,000.
If you own the property in your own personal name, this $50,000 is added on top of your other income and is subject to the marginal tax rate for the respective tax brackets you are in.
For simplicity’s sake, we use the HIGHEST marginal tax rate in Ontario in our calculation – 53.53%, round it down to 50%.
Hence tax liability is roughly $50,000 x 50% = $25,000.
Keep in mind that if you make less than $220,000 personally BEFORE you add in this $50,000, you will be subject to lower tax.
$25,000 is MAXIMUM you would have to pay on the capital gain.
If you own the property in your corporation, the numbers would pretty much the same. 50% is taxable but the taxable portion is considered passive income.
Passive income is taxed at slightly over 50%. Hence, you do the same calculation as above. Take $100,000 x ½ (50% taxable) x 50% (rough tax rate on passive income) = $25,000.
Next time when you are trying to estimate the amount of taxes you would owe when you sell a property, simply take the gain and multiply it by 25%. This will give you a really good idea of how much you would have to pay.