Tax considerations for rental and investment properties
Discover the tax implications of owning or purchasing a rental property within Canada.
By ATB Wealth 24 March 2023 8 min read
If you’ve claimed CCA deductions to offset your rental income, you may have additional tax to pay upon sale. CCA is intended to give you credit for the reduction in your property’s value over time due to wear and tear, but property values for real estate often increase instead. As a result, CCA deductions are often just a tax deferral—you reduce your taxable income when you claim CCA, but you add it back to income as “recapture” if your sale price is higher than the tax-depreciated value of the property. This recapture is taxable as regular income at your marginal tax rate. For example, if your building was bought for $10,000 and you claimed $1,000 of CCA, its tax-depreciated cost is now only $9,000. If you then sold it for $15,000, you would have to re-include that $1,000 of CCA in income.
You could have your tax advisor prepare a tax estimate before selling your rental property to clarify how much after-tax cash you will receive on a sale and avoid any unexpected tax surprises.
The anti-flipping rule
On Jan. 1, 2023, a new federal anti-flipping rule took effect. The goal of this new rule is to ensure that people who buy Canadian real estate for the purpose of resale will be taxed on their profits as regular business income, rather than as capital gains. Not only does this mean that profits are taxed at a higher rate, it also prevents the seller from claiming the principal residence exemption on the sale.
The new anti-flipping rule uses a strict test. It applies if you sell real estate that you owned for less than 365 consecutive days, unless an exception applies. This applies to any sales occurring after January 1, 2023, so this rule can affect properties acquired before that date.
Unexpected life events may require you to sell your property less than 12 months after purchasing it. Fortunately, there are a few exceptions that allow you to avoid the anti-flipping rule. These rule might not apply if the sale is caused by or in anticipation of one of the following events (among others):
- Death, illness or disability of the seller or a related person.
- A new related person joining your household (like the birth of a child) or the seller joining a related person’s household (like moving in with an elderly parent to care for them).
- The breakdown of a marriage or common-law partnership, in some cases.
- Involuntary loss of employment of the seller, or their spouse or common-law partner.
- Relocating to a new residence to be at least 40 kilometres closer to a new workplace or post-secondary institution, in some cases.
- A threat to the personal safety of the seller or a related person.
- Involuntary destruction or expropriation of the property.
- Insolvency of the seller.
Talk about this anti-flipping rule with your tax advisor if you’re selling real estate that you acquired fewer than 365 days ago.
Other taxes and fees
There are several provincial fees and taxes that could apply to your rental property. In Alberta, fees for land transfer and estate probate are minor. However, if you own property in another province like British Columbia these other taxes and fees can become significant. Additional fees may apply to property in certain municipalities, like Kelowna, Vancouver and Toronto. You don’t avoid these taxes and fees by being an Alberta resident. In the event you own or are considering purchasing real estate in another province, talk with your tax advisor to understand the provincial and municipal taxes and fees that could apply.
Interested in learning more about investing in rental properties? Read our comprehensive article.
This summary may not apply to non-residents, corporate investors, or real property located outside of Canada.
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