When selling a commercial real estate asset, effectively maximizing your profits goes beyond the transaction itself. 

In the realm of commercial real estate, capital gains are fairly complex. As they impact every investor differently, understanding capital gains and how they are taxed is a critical step in ensuring you keep as much of your return on investment as possible. 

This is particularly true in Toronto, where property values have risen sharply over the past several years. While many commercial landlords are seeing lucrative returns on their investments in today’s marketplace, some are concerned about the prospect of capital gains tax eating away at their profits. 

Some landlords assume that commercial redevelopment is the most optimal route for the sale of their assets. However, this is not always the case. Click here to read our report on the topic. 

Capital Gains in Canada

In short, Capital Gains refers to the difference between the return earned from the sale of a capital asset and its original cost. As an example, if you sold a property for $500,000 but originally paid $100,000 for it, your capital gains would be $400,000. 

In Canada, any capital gains earned following the sale of a high-value asset (such as commercial real estate) are subject to taxation. Capital gains are reported as part of your annual taxes, however, not all of these earnings are taxed the same. Rather, capital gains are taxed based on the individual characteristics of the asset itself, along with the seller. 

Along with other determinants, the tax rate applied to capital gains from commercial real estate is primarily based on these factors:

  • Type of property sold – ie commercial, residential, vacant land, etc. 
  • Province of sale
  • Land surrounding the building
  • Personal income of the seller

Inclusion Rate

While the final taxation rate applied to individual capital gains will vary, the inclusion rate will remain the same. In Canada, the inclusion rate for capital gains tax is 50%. This means that only half of your total capital gains amount is actually subject to taxation. Returning to the example from above, if your capital gains totalled $400,000, only $200,000 of your earned income will be taxed. 

Considering the sale of your commercial real estate property? Explore these resources from strategic, ROI-amplifying insights. 

Calculations For Commercial Landlords

For commercial real estate investors, understanding how capital gains are taxed is essential to optimizing the volume of profits you are able to retain following the sale of your asset. As capital gains on commercial properties adhere to unique protocols, there are certain distinctions to be aware of, such as the difference between capital expenditures and incurred expenses. 

When calculating capital gains earned on the sale of your commercial property, there will be other costs to factor in beyond the market value at the time of acquisition. Factoring in the adjusted base cost, determining capital gains should also consider any non-recurring costs incurred during the upkeep, enhancement, or sale of the property. This could include major additions to the property, as well as real estate-related expenses like agent commissions, legal fees, survey and inspection fees or other one-time costs. 

Looking for more commercial real estate resources? Explore these educational insights from our blog. 

Before You Sell

If you’re a commercial real estate investor who is looking to sell their property, you’ll want to work with a professional expert who understands the unique nature of commercial assets. 

As leading commercial real estate investment specialists in Toronto, InTrust can help you maximize your returns. Led by industry veterans, our approach to selling is both strategic and analytical. When you work with us, we’ll help you navigate the capital gains process with ease, highlighting every opportunity for deferment and capital expenditures to ensure no money is left on the table. 

In addition to wealth-building financial strategies, our agents act as your guides throughout the complete process of listing your property. We’ll empower you with an in-depth education on commercial real estate, ensuring you understand every option at your disposal. Our institutional-quality underwriting services, innovative marketing tactics, and powerhouse negotiations help uncover and attain the highest possible value from your sale. 

Seeking an exceptional commercial real estate sale? Our team can help you maximize your returns through strategic deferment and value-adding underwriting services. Send me an email or call me at 416.930.3890 to get started.

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