Sarah bought an investment property 3 years ago for $400,000 and sells it today for $550,000. What amount will be subject to capital gains tax?
Correct Answer
C) $75,000
Capital gains tax applies to 50% of the capital gain. Sarah's capital gain is $150,000 ($550,000 - $400,000), so the taxable portion is $75,000. This amount is added to her other income and taxed at her marginal tax rate.
Why This Is the Correct Answer
In Canada, capital gains tax applies to only 50% of the capital gain realized on investment properties. Sarah's total capital gain is $150,000 ($550,000 sale price minus $400,000 purchase price). However, only half of this gain ($150,000 ÷ 2 = $75,000) is subject to taxation as taxable capital gains, which gets added to her regular income and taxed at her marginal rate.
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Sarah owns two properties: her principal residence worth $600,000 (purchased for $400,000) and a cottage worth $300,000 (purchased for $200,000). If she sells both in the same year, what is her taxable capital gain?