Tax Tip Thursday

Capital Gains & The Cottage

Everyone loves cottaging, so let’s go to the cottage this week.

Because of Covid, it has been a couple of years of fanatic cottaging. Everyone was trying to escape the city!

  1. As a result, the prices of cottages have exploded!
  2. Another thing that is happening, is that the greatest number of people in one generation (baby boomers) are reaching an elderly age.
  3. And one more important thing that is happening, is that the baby boomers are pretty much the 1st generation to really embrace cottaging!

Yes, these 3 things are all related. As a result, in the tax world, we are facing the perfect storm.

The Problem

The problem is that as the population is aging, assets need to pass from one generation to the next. Because there are so many baby boomers and because they really were the 1st generation to embrace cottaging as a generation, we have not seen this problem to such a large degree before. The passing of assets between generations, almost always is going to create a very large capital gain unless you plan for it ahead of time and it has gotten significantly worse in the last 2 years and only promises to get worse. We are dealing with many clients in this situation right now and they all pepper me with the same questions, all seeking a way to move the cottage to the children without it costing a ton of tax dollars.

BAD NEWS, people, there really is no way to escape it.

What You CAN’T Do

So, to short circuit some of your questions…..

  • Can we put the kids on title? Any change of ownership is a “deemed” disposition which triggers a capital gain
  • Can we give the cottage to the kids? Any gift of the cottage to family or anyone else is a “deemed” disposition which triggers a capital gain
  • Can we sell the cottage to the kids for a nominal amount or some amount less than Fair Market Value? You COULD get away with it, but if CRA looks at the transaction (which they tend to do with these types of transactions), it will be double trouble!
    • Your transaction amount will stand for the purchaser (the kids),
    • BUT the seller’s (Parents) end of the transaction will be corrected to reflect the Fair Market Value
    • The outcome is that the seller will need to pay the tax on the Fair Market Value triggering an even larger capital gain AND the purchaser will have a lower cost base and when they sell/transfer, they will be paying tax on a much larger capital gain.
    • So, it is double taxation
  • Could we put the cottage in a trust? Yes, but it is a change of ownership and will trigger a capital gain.
  • Could we put the cottage in a Corporation? Yes, but it is a change of ownership and will trigger a capital gain.
  • My spouse is on title, will there be capital gains? If it is NOT your principal residence, then yes there will be capital gains on their portion of the ownership.

What You CAN Do

So I have told you what you CANNOT do, what CAN you do? There are many things you can do going forward, but none of them eliminate the capital gains, they pretty much only defer them to a future date. Unfortunately, it will not help out any of the people in this situation now, but it might help people going forward:

  • Buy life insurance if the parent does not have some already. Insurance is tax free and could pay the capital gains tax.
  • Put the cottage into a corporation with the kids as shareholders
  • Put the cottage into a trust. Under the right circumstances, you could escape the capital gains, but you will be passing it along to your children in 21 years (trusts have a deemed disposition of assets every 21 years and all taxes must be paid as if the property was sold)
  • Put the kids on the cottage at the beginning or early in the process
  • Making the cottage the principal residence of the parent early in the process
  • Sell the cottage to the kids
  • Have the cottage appraised at the lowest possible value and complete the transaction at that time. Remember, documentation is key!

Can’t Avoid the Taxes

These measures in themselves are not tax free, but they will help you mitigate tax liabilities earlier (and smaller) than later.

There are, of course, other factors as well. Land transfer fees, probate fees, mortgages on properties, putting ownership in kids’ hands, having multiple owners of the same property, and family having to agree on significant financial decisions all come into play here.

This can be a very complicated process, and no one way is the best way to do it. Everything depends on your particular circumstance. We’ll be happy to figure out what the best way for YOU is, though! Book an appointment today to get started.

Disclaimer:

This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.