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How can gain tax be reduced or eliminated?
Expert: John R Mott
My wife and I own a small incorporated corporation. The corporation owns a rental property for the last 15 years. If we decide to sell this property, we expect to make a gain of about $600,000. How can we reduce or eliminate the gain tax.
John R Mott answered:
If you realize a gain, then you are going to incur tax, that's an axiom. But there are a number of factors relevant to how a capital gain is taxed in a corporation. Your capital gain will equal the selling price, net of selling costs, less the cost base. Firstly, you should ensure that your cost base includes all of the allowable additions, including the original cost, ancilliary costs of acquisition (e.g. land transfer fees and legal costs) as well as subsequent capital improvements to the property. You should also ensure that you identify all selling costs, including expenses incurred to promote the sale of the property and ready it for sale. Proper accounting for all of these applicable costs will minimize the amount that is subject to tax.
If your corporation has or can trigger capital or non-capital losses, then these can be applied to reduce the capital gain that you realize on the rental property.
If you take back a mortgage on the sale of the property, then you can defer the capital gain that you realize over a maximum of five years.
One half of the gain realized from the sale of the property is added to a notional tax account called the Capital Dividend Account. An election may be filed to distribute this amount as a tax free dividend.
A portion of the tax that the corporation pays on the capital gain is added to another notional tax account called the Refundable Dividend Tax On Hand account. This tax may be recovered by the corporation when it pays taxable dividends.
If you have claimed depreciation on the rental property over the years, then you will be required to bring cumulative depreciation claims back into income in the year of sale (called "recapture"). This income inclusion is additional to the capital gain described above and will be taxed as rental income.
About the author
John Mott is a chartered accountant and tax specialist with a private practice in mid-town Toronto. He provides tax, accounting and advisory services to individuals and small businesses. He may be visited online at: johnmott.com.