Poor planning can cost you and your family dearly
Jonathan Chevreau
Sun
You have to plan ahead when it comes to passing on the family cottage to your children. Photograph by: Peter Redman, National Post
Assuming our political leaders won’t drag us into a snap election, many Canadians can look forward to leisurely weeks and weekends at their cottages for the rest of the summer .
But there are major tax and estate planning issues associated with cottages: the legacy of many earlier decisions by other politicians.
The CIBC has issued a report on strategies to deal with the issues surrounding what it calls the four Cs of summer: the cabin, condo, chalet or cottage.
Jamie Golombek, CIBC’s managing director of tax and estate planning, says the most important tax consideration is the tax-efficient transfer of property between generations. “Poor planning can have costly results and — in extreme cases — may force the sale of a property that has been in the family for generations.” It’s best to plan things out with a professional advisor before these issues come to a head. To fail to do so is to invite potentially large capital gains tax headaches if vacation properties are gifted or sold to family members, or inherited should the owner pass away.
“If you sell or gift the property while you are alive, you will generally be taxed on the difference between the amount you receive and the adjusted cost base (ACB) or tax cost of the property,” Golombek says. He advises keeping all receipts for improvements because these expenditures can be added to the ACB of the property and reduce the capital gains on disposition.
If property is gifted to a spouse or common-law partner during your lifetime or on death, the property is deemed to be transferred to the other spouse or partner at its ACB and no gain will be immediately reportable.
Parents can give the vacation property to their kids while alive or on their death, but this results in an immediate capital gain if the property has appreciated in value.
The principal residence exemption can shelter gains on your main residence from capital gains tax.
However, a principal residence can include a vacation property, even if it’s not where you primarily live as long as you “ordinarily inhabit” it at some point in the year.
Golombek says a cottage is considered ordinarily inhabited even if that person lives there only during the summer or some other part of the year — as long as the main reason for owning it is not to earn income.
Incidental rental income won’t prevent a cottage from qualifying as a principal residence. A home does not even have to be in Canada to qualify as a principal residence but the claimer must be a resident of Canada for each year of claim.
One way to defer tax liability on the transfer of a cottage is life insurance, which may be less than some think. To defer potential tax on a $500,000 gain the insurance cost can be less than $100 per month. However, cottage owners in their 70s or older may be uninsurable or find the premiums prohibitively expensive.
Some use trusts to avoid the deemed disposition of a property upon the death of the owners. The problem with using a trust for a property you currently own is that a transfer of the property to a trust may trigger immediate capital gains tax.
Golombek says if you buy a new property or own one with little or no accrued capital gains, you could purchase it through the trust or transfer existing property into a trust so any future capital gains tax can be deferred until the trust’s beneficiaries (generally the children) ultimately sell the property.
The trust may permit you to enjoy the use of the property during your lifetime. Later, it can be distributed to the beneficiaries.
This will be rolled out at the original ACB of the property, so tax would be deferred until the property is sold by the beneficiary. Even here, however, you need to consider a tricky 21-year rule.
© Copyright (c) The Vancouver Sun
