Do you have a family cottage – maybe one that’s been in the family for many years?
Did you know that your cottage is not safe from capital gains? Yes, there really aren’t many assets left that we own that don’t attract some form of tax.
Capital gains in this type of situation are straightforward. If you sell your cottage for more than its purchase price you will be taxed on the difference. In Ontario, that tax is approximately 25% of the difference in purchase price and the eventual sale value.
With the housing boom in recent years, most properties have seen a significant increase in value. What does that mean? Well, the capital gain you pay on that picturesque little cottage you purchased back in 2006 is going to be a tidy sum.
Whether you sell your cottage or gift it to your kids, capital gains can be largely unavoidable.
However, there are ways to plan when it comes to dealing with capital gains on your cottage.
First, you can consider setting up a fund and saving for the capital gain payment in advance – years before you end up selling or otherwise disposing of the property.
You can consider setting up a living trust for the cottage. While this approach gives you greater long-term control over your cottage, you’ll likely still be taxed for capital gains to the date of the transfer.
Purchasing life insurance is another option to addressing capital gains of this nature. Couples can consider buying a joint and last-to-die life insurance policy. This type of policy, which costs less than an individual policy, is paid out when the surviving spouse dies. If the couple initially holds the property jointly with a right of survivorship, the property passes solely to the surviving spouse when the first spouse passes away. Eventually the cottage can be passed on to the surviving spouse’s beneficiaries under their will. At the death of the second spouse the insurance benefit is paid to their beneficiary or their estate which can be used to cover the tax bill.
If you are nearing retirement and your cottage has appreciated in value more than your current home, you can consider designating your cottage as your primary residence and selling your home. The Canada Revenue Agency will allow this “principal residence exemption” only if you report the sale and designation of the principal residence in the capital gains section of your tax return.
The above are just a few options you can consider. Whichever option you choose, each has its advantages and drawbacks. Be sure to consult with a lawyer to determine which option is best for you. In the meantime, enjoy some time away at that capital gains magnet of yours – er, we mean your cottage.
Robin K. Mann, Associate Lawyer