Buying a property or business in Canada? If so, then you must know about the biggest strategies to reduce Canadian income taxes. 

Many newcomers will be residents of Canada for tax purposes. They will have a Social Insurance Number and will have to file income taxes with the Canada Revenue Agency annually.

Read on to learn about the significant capital gains tax exemptions that newcomers can legally use to reduce their tax bill. 

Note: Canadian tax legislation is complex. This blog simplifies some of the concepts. 

Principal Residence Exemption 

Usually, when you sell or otherwise dispose of a capital asset, including a home, you are subject to capital gains taxes. This implies that you have to pay income tax at your marginal tax rate based on the amount of taxable capital gain. 

The capital gain is equal to the amount of disposition minus the asset’s adjusted cost base. 

For instance, if you buy/ purchase a rental property for $50,000, and sell it for $250,000, you would have a capital gain of $200,000 for your income tax on the year in which you sold the rental property. At the current capital gains inclusion rate of 50%, you will owe income taxes on $100,000. Moreover, if your marginal tax rate is 50%, you will owe $50,000 in taxes. 

Canadian tax legislation provides an exemption to capital gains for the sale or disposal of a taxpayer’s principal residence. This implies that if you have lived in your principal residence for the entire time that you have owned it, and if you qualify for the exemption, you will generally need not pay any income taxes when you sell or dispose of your home. Any gains you get from the disposition of your principal residence will generally be tax-free, provided it’s been your principal residence for the entire time you have owned it. 

Furthermore, a property must qualify in order to be a principal residence. You will have to identify your principal residence annually on each tax return you file. 

Lifetime Capital Gains Exemption 

Another one of the biggest strategies to reduce Canadian income taxes is the lifetime capital gains exemption. 

Canadian tax legislation provides for a ‘lifetime capital gains exemption’ for gains realized on the sale or disposition of qualified property. Qualified property includes the following: 

  • Qualified small business corporation shares 
  • Reserves, as well as trusts 
  • Qualified farm or fishing property 

Every individual taxpayer might take advantage of this lifetime capital gains exemption, provided they qualify.      

For 2023, the lifetime capital gains exemption is $971,190. An individual taking advantage of the full exemption would thus reduce their taxable income by $485,595. Assuming this individual is in the 50% marginal tax bracket, this would save them over $200,000 in income taxes, assuming they are in the 50% marginal tax bracket. 

Non-Residents Are Not Eligible  

To claim the lifetime capital gains deduction, you must be a resident of Canada for tax purposes when you dispose of the property. 

How Do I Know If I Am A Resident Of Canada For Tax Purposes?

Apart from the biggest strategies to reduce Canadian income taxes, one must also know if they are a resident of the nation for tax purposes. 

The CRA considers several factors in determining tax residency, including the following: 

  • How much time you spend in Canada
  • Whether you have a home in Canada
  • Whether you have a common law partner, spouse, or dependents in Canada
  • Economic ties to Canada
  • Health insurance in Canada
  • Personal property in Canada
  • Canadian government identification 

Even if you have left the nation, you might be considered a factual Canadian resident under certain circumstances if you maintain residential ties. 

Individuals can consult Income Tax Folio: S5-F1-C1: Determining an Individual’s Residence Status. 

They can also call the CRA at 1-800-959-8281 from anywhere in Canada or the United States or 613-940-8495 from outside Canada and the United States. 

Beware Of Tax Scams 

Be especially wary of anyone approaching you with offers to help you avoid paying income taxes. Tax reduction strategies are legal; they take advantage of legislation. Tax avoidance or tax evasion is illegal, and such scams are prevalent. This is why it is vital to always consult with a reputable and experienced tax professional before making any decisions.  

If you seek information on how to begin your Canada immigration application process, you can talk to our NavaImmigration experts at 1800-918-8490, or you can drop us an email at [email protected].