Knowledgeable investors prepare themselves in advance for this disposition, beginning when they plan the acquisition of the property.
Too frequently we receive a phone call or e-mail a day or two before the scheduled sale of a property, or, worse yet, a few days after. At this point, we're score-keeping as minimal planning is available after the fact.
Some opportunities within the Income Tax Act require three years to implement. Practically speaking, other opportunities require more time as the benefits of appreciation tend to take place over an extended period of time as compared to a few weeks before a sale.
Thus providing your tax adviser with time in turn provides you with more opportunities and quite possibly, provides you with more cash in your pocket - after taxes.
Before selling your property, it's prudent to ensure that a sale is the best alternative in your situation. Perhaps if, for example, you are looking for cash, a simple refinancing would suffice.
Alternatively, where attempting to transfer the property to children or remove the property from your personal hands, it is possible to complete a tax "rollover" which can generally defer income taxes where a corporation is involved.
Effectively, a rollover in many cases can allow you to move a property to a corporation, for example, and then allow others to enjoy the future growth in value, income generation and principal repayment without triggering immediate income taxes.
Family trusts and gifts can be useful tools in transferring properties as well, each though with tax consequences.
When you know that there will be a disposition, which will be taxed, it is important to determine whether the profit (or alternatively the loss) will be taxed as income or a capital gain. Most people assume that a capital gain results on the sale of real estate. Surprise can result where the Canada Revenue Agency believes the sale was on account of income, and taxed on 100 per cent of the gain as compared to 50 per cent. As this is one of the most litigated areas in tax, caution is warranted.
So, the big question relates to how we can mitigate the tax impact of a sale. Several potential answers exist depending on the situation.Uncover these six money-saving tips by downloading a copy of our December 2010 issue.
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Selling a property may create apprehension of burdensome taxes, however, many opportunities also present themselves.