Sarah purchased a rental property in British Columbia for $800,000 and sold it three years later for $950,000. What portion of her $150,000 capital gain will be subject to income tax?
Correct Answer
A) $75,000 (50% of the gain)
In Canada, 50% of capital gains are included in taxable income. Since Sarah's capital gain is $150,000, she must include $75,000 (50%) as taxable income on her tax return. Rental properties do not qualify for the principal residence exemption.
Why This Is the Correct Answer
Under Canadian tax law, capital gains on investment properties are subject to the capital gains inclusion rate of 50%. This means only half of the capital gain is added to taxable income. Sarah's $150,000 capital gain results in $75,000 being included as taxable income. Rental properties are investment properties and do not qualify for the principal residence exemption, so the full capital gains treatment applies.
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