When spring and summer rolls around, many Canadians make their way to the cottage. It can be a great place to relax and enjoy time with your friends and family. However, if you plan to sell your cottage or pass it on, some tax consequences could incur. Here are some ways to minimize potential tax hits.
The first consideration is the tax bill for the cottage. In Canada, there is a principal residence exemption. This means the home you deem as a principal residence can be sold without paying any tax. Having said that, if you own more than one property, say a house and a cottage, one of those properties will have to be taxed when it's sold. The second property doesn’t have to be a cottage, a second home, condo, or vacation home also fall in that category. The tax on the second property is referred to as capital gains. The price you pay for the cottage and any money spent on improvements to the property are added together to form your adjusted cost base (or ACB). The amount of the sale that exceeds your ACB is your capital gain. Half of which is tax free, while the other half is added to your income and taxed according to your income tax rate. For example, if you paid $100,000 for your property and sold it for $300,000, you have a $200,000 capital gain. $100,000 of that gain will be tax free, and the remaining $100,000 will be added to your income. If your usual income is $40,000, your yearly earnings would go up to $140,000 upon selling your property. If you choose to pass the cottage down to the next generation, when you pass away, there is a “deemed disposition,” which means even though you don’t sell the cottage, the government will treat the change of ownership as a sale and tax you for it. Your estate and beneficiaries will have to deal with the capital gains tax. Minimize your taxes How do you minimize the tax on your cottage? One way is boosting your ACB. Any major upgrade or renovation that improves your cottage can be added to your ACB. The larger the ACB, the smaller the capital gain, which means less tax. However, regular maintenance and repairs do not count. Only enhancements or additions to the property can be considered. Make sure to keep your receipts. It is possible that your cottage has a larger pending tax bill than your home. You don’t have to live at a residence permanently for it to be considered your principal residence. You can designate your cottage as your principal residence. Usually the tax bill can help you determine which property to designate. This is typically done by calculating the expected capital gain for each property, then averaging that amount based on how long you owned the property. The property with the largest capital gain should be considered the principal residence. This way, your principal residence exemption will save you the most tax. This last strategy is not for everyone. If you choose to sell the cottage to your kids, it is possible to create a promissory note allowing your children to pay you over the course of five years. Instead of having to claim capital gains in one lump sum in the year of sale, it can be broken up over five years. This lowers your total income and can lower your overall tax bill. It’s important to talk to your lawyer and accountant before you try to implement this strategy. Other Considerations This is only the tip of the iceberg when it comes to cottage succession. You may choose to sell your home and move to the cottage. You may add one of your kid’s names to the title. Perhaps life insurance can be used to ease the tax burden. There are lots of ways to structure a cottage succession plan. Talk to your family and make sure everyone is on the same page before connecting with your financial professionals to put a plan in place. CANACCORD GENUITY WEALTH MANAGEMENT IS A DIVISION OF CANACCORD GENUITY CORP., MEMBER-CANADIAN INVESTOR PROTECTION FUND AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA The comments and opinions expressed in this article are solely the work of Clinton Orr, not an official publication of Canaccord Genuity Corp., and may differ from the opinion of Canaccord Genuity Corp’s. Research Department. Accordingly, they should not be considered as representative of Canaccord Genuity Corp’s. beliefs, opinions or recommendations. All information is given as of the date appearing in this article, is for general information only, does not constitute legal or tax advice, and the author Clinton Orr does not assume any obligation to update it or to advise on further developments related. All information included herein has been compiled from sources believed to be reliable, but its accuracy and completeness is not guaranteed, nor in providing it do the author or Canaccord Genuity Corp. assume any liability. Tax & Estate advice offered through Canaccord Genuity Wealth & Estate Planning Services Ltd. |
AuthorClinton Orr is a Senior Wealth Advisor and Senior Portfolio Manager with Canaccord Genuity Corp. Archives
July 2023
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