Your Family Trust Might Need Some Tweaking
2) The gain accruing from the beginning of 2017 to the date of disposition (this portion will be subject to tax).
Do You Plan to Live at Your Cottage Full-time When You Retire?
If your plan is to sell your home and eventually use your cottage as your principal residence, it’s a good idea to sketch out that plan to forecast the tax implications of various scenarios. If you were to sell your principal residence and then move to your cottage to live, you do not have to pay capital gains tax on the sale of your house, but you would need to report the sale because CRA (the Canadian Revenue Agency) now requires the reporting of your sale on your income tax return for tracking purposes.
Once you move to your cottage it would become your principal residence. However, if you chose to sell your cottage at some future date you will trigger a capital gain tax bill because it has not been your principal residence for the entire time you have owned that property. In order to calculate the tax you owe, CRA would use the following calculation:
# of years home is owned
Do you plan to pass down the cottage to your kids?
If your wish is to pass along your cottage to your children, then you will need to give careful thought regarding how you intend to do this and what implications it may have for your children. You can pass down the cottage as a part of your estate:
Scenario One: You have been living full time in your cottage at the time of your death. In this scenario, the capital gains tax owed by your estate will be calculated as though you sold the property (see calculation above).
Scenario Two: You have NOT been living full time in your cottage at the time of your death. The tax triggers for each property will be based on their status as property: principal residence (home) and personal-use property (cottage). Both properties will be treated as though they were sold and the tax owing will be determined thusly:
- Your Principal Residence – exempt from capital gains tax
- Your Cottage – your estate will be required to calculate the increase in the value of the cottage from the purchase date to the date of death. If the cottage has been owned since before 1972, only the increase in value since December 31, 1971 is taxable, because taxation of capital gains began with the 1972 taxation year. December 31, 1971 is the valuation day for properties owned prior to that date.
Sell The Cottage to Your Kids at a Bargain Price
- How will the taxes, running and maintenance costs be shared/paid for?
- How will the usage time at the cottage work?
- What if one of your children decides he/she wants to sell their portion? Or is forced to because of a divorce scenario?
Cottages are wonderful places for families to gather, share experiences and make memories, so it’s important to take some time to plan for a smooth transition into the future. There is a method that can accommodate the unique structure of your family.
As a shared family cottage owner myself, and Chartered Professional Accountant, I can understand the situation from both sides. If you would like to chat about your cottage or estate planning issues, and determine the best tax planning structures for you and your family, please email me at firstname.lastname@example.org so we can arrange a time to meet.