The perennial question I get from real estate investors who are selling a property is whether the length of time they hold the property affects the income tax treatment. In other words is the gain treated as capital gains vs income? For example, I’ll be asked some variation of: “If hold a property for 23 years and then sell it, is the income treated as a capital gain or as income?”
Intention not timing for real estate and capital gains vs. income
Many people wrongly believe that holding a property for a given period of time will ensure the profits on sale are treated as capital, and thus are only 50% taxable, versus treating the gain as income, which would be 100% taxable. Tax case law illustrates this. In Bordine vs. The Queen (2010 DTC 1293 (TCC)) the owner acquired land in 1977, sold it in 2000 yet the amount was still considered income. Intention matters!
While the length of ownership is an indicator, the ownership period is not conclusive. Do not let others tell you that simply by owning the property for two or five years, for example, you are guaranteed a taxable gain. Nothing can be further from the truth.
Knowing, and being able to prove, what you were planning to do with a property at the time of purchase is a key factor in determining whether the CRA will treat the property as a capital gain vs income. Having a discussion, and documenting your intentions, with your accountant can save you considerable taxes down the road.
Resources
For additional resources related to the real estate and tricky tax issues, see:
- Buying real estate in a corporation: A guide for Canadian investors
- Deducting repair costs: How the court sees it
More questions?
Still have questions on real estate and capital gains vs. income? I want to help you Do wonderful things®, so please contact me today.
Remember – circumstances are unique! This information is summary in nature. Seek out advice from your tax advisor about your specific situation.
