If you’re selling your home, you likely just want to get it over with and get started on the new chapter in your life in your new home. But hold on – you may have to deal with the tax man. Are you looking for information regarding Tax Implications of Selling Your Home in Alberta? If you made a profit on the sale of your home, you may need to pay capital gains taxes. Having some understanding of the pertinent tax rules can help you minimize your tax bill. So let’s take a look at the tax implications of selling your home in Alberta.
The Likelihood of Paying Taxes on the Sale of Your Home
If your home has appreciated significantly, as is often the case, you’ll get a large payday when selling your home in Alberta. But you will also probably owe the government money for the profits earned on the sale. For you your home is an asset and so it is subject to capital gains taxes.
Capital Gains Tax in Alberta, Canada, refers to the tax imposed on the profit (or gain) realized from selling or disposing of a capital asset (real estate, investments, or certain personal property). The gain is calculated as the difference between the selling price of the asset and its adjusted cost base, which includes the purchase price plus any associated expenses like renovation or legal fees.
Consider, too, that home prices rose dramatically between 2020 and 2022. This means that your home probably experienced significant capital gains. So, yes, it’s very likely that you will have to pay taxes when you sell your home.
But, there is some good news: Exemptions! Yes, the Principal Residence Exemption allows homeowners to exclude capital gains on the sale of their primary home (the home designated as your principal residence) from taxable income. This is a federal tax exemption that applies to all provinces and territories in Canada.
There are some eligibility requirements for the Principal Residence Exemption (PRE) which are:
- As mentioned above the property must be designated as your principal residence.
- You, or your family, must has ordinarily inhabited the property during the years it is claimed as being your personal residence.
- It can include various types of homes (single family home, town home, condo, mobile home, etc.)
There are also some limitations to the PRE:
- Only one property per family unit can be designated as a principal residence in a given year.
- If a property was not your principal residence for the entire period in which you owned it (an example would be a rental property) the PRE will only apply to years you lived in it and it was designated your primary residence
How Capital Gains Taxes Work
As mentioned Capital gains taxes in Canada apply when you sell or dispose of certain types of assets, such as real estate, stocks, or investments, for more than their adjusted cost base (ACB). Here’s a breakdown of how they work:
A capital gain is the profit made from selling or disposing of a capital asset. It is calculated as:
Capital Gain = Selling Price – Adjusted Cost Base (ACB) – Selling Expenses
- Adjusted Cost Base (ACB): Shown above ACB is the original purchase price of the asset, plus any costs incurred to acquire or improve it (e.g., renovations or legal fees).
- Selling Expenses: Costs directly related to the sale, such as real estate agent fees or transfer taxes.
What Portion of Capital Gains is Taxable in Canada?
In Canada only 50% of the capital gains is taxable. In order to calculate this:
- Calculate the total you gained
- Take 50% of that gain and add it to your taxable income that year
This will be taxed at your marginal tax rate, which depends on how much money you earn in total and the combination of federal and provincial tax rates in the province that you live. Unfortunately, the more money you earn.. the more tax you pay!
How to Avoid Capital Gains Tax
There really is no way to avoid paying capital gains tax altogether in Canada. Luckily there are some exemptions and special rules:
Principal Residence Exemption (PRE) – We discussed this above in detail, but as a reminder you don’t pay any capital gains on the sale of your principal residence as long as it was designated your principal residence for the entire time you are claim the PRE.
Lifetime Capital Gains Exemption (LCGE) – This will apply to very few, but it is worth noting. Certain assets (such as qualified business corporation shares or qualified farm properties, may qualify for this exemption in capital gains. Best to talk to a qualified tax advisor if you fall in this category.
RRSP/ TFSA Investments – Any capital gains earned on investments inside of one of these tax sheltered vehicles will be tax free. There is a whole other article that could be written on this, and there are many out there to reference from your bank or financial advisor, but utilizing these types of investments in the long term is incredibly valuable for the average Canadian. Personally I like the TFSA because the earning are tax free (though you already paid tax on the money you invest into it) and it doesn’t trigger a tax event if you want to remove the money and invest it elsewhere. Again, best to speak to a professional and be aware of the timeline to recreate contribution room (you have to wait until the next calendar year) and over-contribution penalties.
It is best to speak to a tax professional regarding the best strategies to minimize what you pay in capital gains tax.
Special Circumstances
In Alberta gaining ownership of the home during a separation/divorce will have specific implications for capital gains tax depending on how the property was used (rental, vacation home, primary residence) and the specifics of how ownership was transferred.
If you receive the property as part of a divorce settlement then the transfer itself will not trigger capital gains tax owed at that time, it will be tax-deferred. The spouse that receives the property will inherit any accrued capital gains from the original owner. This means any future capital gains tax liability with be the new owners responsibility when the property gets sold. This is based on the original purchase price and not the market value at the time the property was transferred.
If the property received qualifies for the Principal Residence Exemption (PRE) then it can shelter the property from capital gains tax when it gets sold. Remember that it has to have been designated as a principal residence for the entire time the house was owned in order to qualify in full. If it was used for any other purpose during that time (rental property, vacation home, business purposes) then you will likely only receive a prorated amount of the PRE.
How To Move Forward
- Confirm Principal Residence Status:
- Determine if the home qualifies as your principal residence for all years, including when it was owned by your ex-spouse.
- Seek Professional Advice:
- A tax professional or family lawyer can ensure the transfer and sale of the property are handled in the most tax-efficient way.
- Keep Documentation:
- Maintain records of the original purchase price, improvements, and the date of transfer for accurate capital gains calculations.
Understanding the implications of divorce-related property transfers is crucial for minimizing future tax liabilities.
If this capital gains tax business seems complex and complicated, that’s because it certainly is. So when selling your home, be sure to consult a tax professional and an experienced Alberta investor. We can guide you through the basics to help you arrive at the best outcome when you sell your home. So if you have concerns about the tax implications of selling your home in Alberta, be sure to contact us at (403) 383-6592.