My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Monday, September 18, 2017

Proposed Changes to the Voluntary Disclosures Program (VDP)

Most people are aware of the Canada Revenue Agency’s Voluntary Disclosures Program, or VDP. This program gives taxpayers the opportunity to make changes to previously filed returns, and to file returns that haven’t been filed, and provides relief from penalties and potential some interest that would have been assessed.

On June 9, 2017, the CRA proposed changes to the Voluntary Disclosures Program. These proposed changes will impact a taxpayer’s eligibility for the program and impose new conditions on those who apply.

Large Corporations


For corporate taxpayers, if the company had gross revenue of more than $250 million in two of the last five tax years, the application would generally not be accepted under the proposed changes. Neither would applications related to transfer pricing adjustments.

Dual Streams


The proposal also included two new “streams” for disclosures called the General and Limited programs. However, taxpayer’s would not apply to one program or the other. Applications would be made to the program and, if accepted, the CRA would determine the program/stream under which it would be evaluated.

The main difference between the programs would be the relief provided. Penalty and interest relief would be available under the General Program, whereas no interest relief would be available under the Limited Program.

To determine the stream under which an application should be assessed, CRA would consider the following criteria:

  •  Were there active efforts to avoid detection (use of offshore vehicles, etc.)? 
  • Are large dollar amounts or multiple tax years involved? 
  • Is the disclosure being made after the CRA has made it known that they intend to focus on the area of non-compliance that is being disclosed? 
  • Is there a high degree of taxpayer culpability in the failure to comply?
If one or more of the above conditions are met, the application would likely be evaluated under the Limited Program.

There are two significant changes that would affect all applicants. The first that payment for the estimated tax owing will need to be included with the application under the proposed rules and two, a no-name disclosures will no longer be an option. That being said, the CRA has indicated that it would allow taxpayers to have pre-disclosure discussions on a no-name basis to provide them with insight into the process, the risks involved in remaining non-compliant, and the relief available.

Changes have also been proposed to the way interest relief will be calculated. Under the General Program, there are two time periods to consider: for the three most recent years required to be filed, full interest would be assessed; for years before the most recent three years required to be filed, 50% of the interest otherwise applicable would be assessed. As previously mentioned, no interest relief would be available under the Limited Program.

It is important to note that CRA reserves the right to audit or verify any information provided under the VDP application, whether it is accepted into the program or not.

Keep an eye out for an official announcement on the proposed changes, which is expected in the fall of 2017.

I would like to thank Samantha Harris, CPA, CA, Senior Accountant, Tax for BDO Canada LLP for her extensive assistance in writing this post. 

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, September 11, 2017

Tax Planning Using Private Corporations - A Philosophical and Critical Review

I am back from my summer break. Today, I comment on the Liberal tax proposals put forth in July, in respect of the taxation of private corporations. I have a feeling I may be writing on this topic several times this year.

On July 24th, I wrote a blog post on the Liberal government’s proposals for tax planning using private corporations. As these proposals were released mid-summer, it took a while for small business owners and professionals to understand the potentially complex and punitive nature of these proposals. If you want to read an updated summary with recommendations on this issue,
this report by BDO Canada is very good.

I can tell your first hand that there is a lot of anger among business owners for what they consider a totally misguided government notion that business owners should be treated in exactly the same manner for tax purposes as their employees who take none of the business and financial risks and the implication private business owners are abusing the tax system. Opposition has been growing throughout the summer and there is a mounting backlash from professionals and small business owners against these proposals. Based on email responses I have been CC'ed on, local MPs are taking this issue seriously. Whether this pressure will cause Prime Mister Justin Trudeau and/or Minister of Finance Bill Morneau to change their stance on this issue remains to be seen.
Whether you philosophically believe these proposals are fair (and based on feedback both publicly and to my email inbox, most of my readers think they are not fair), these rules will create a very negative climate. Just as importantly, there is currently tax paralysis, as advisors are not sure what the rules are and will be and thus, they cannot properly assist their clients. One way or another, a clear path needs to be set as soon as possible.

I could provide a laundry list of reasons why I feel these proposals unfairly target small business owners and professionals, but that is not my objective for this post. What I want to discuss is the feedback I have received from those affected by the proposals, other accountants, and employees who may not feel as aggrieved.

The proposals target three specific areas:

1. Converting Income into Capital Gains

2. Income Splitting

3. Taxation of Passive Income

Converting Income into Capital Gains


When people speak frankly about this proposal, there is generally unanimous consent that the proposals for the conversion of income into capital gains are “fair”. I don’t think that if this proposal was released in a typical budget that it would cause much consternation. There is concern however; that the government has to distinguish between aggressive tax planning and tax planning that avoids double tax (such as pipeline planning upon death).

Income Splitting


When discussing this topic, most business owners and professionals feel these proposals are punitive and generally unfair save one provision (the capital gains exemption – which I discuss below). These proposals in general will prevent family income splitting (as the income will be taxed at the highest marginal tax rate) unless there is reasonable compensation and the compensation is based on labour and capital contributed.

Where I have discussed these proposals with people that are employees, in general they feel the proposals are unfair to restrict income splitting with spouses, but they tend to agree with the government that income splitting with children should be eliminated.

Business owners feel the income splitting rules are unfair is that they look at their business as a family business, not a business owned by a sole individual, even if that individual is the only one actually working the business full-time. For example, many spouses who do not work in the business either gave up a full or part-time career to enable the business owner to work the hours required. Spouses in many small businesses are sounding boards and consultants. When a spouse comes home they discuss over dinner or drinks decisions to be made regarding expansion, employee issues, equipment purchases, etc. The unpaid “consulting or sympathetic listening time” for spouses is immense. This does not even account for the family time lost due to the crazy hours worked by entrepreneurs. Children are often called in to assist with a new business in many ways for no pay and/or to have time to spend with the parent/owner.

Most business owners feel it is fair for spouses and children to own shares in a family corporation. Although when pushed, in general they feel that the $835,716 small business capital gains exemption should be restricted to spouses only and at most children over 18 years of age. Non-business owners feel that children should have no access to the capital gains exemption.

So in summary, I would suggest most business owners and non-business owners feel these proposals are extremely unfair in respect of spouses, but many non-business owners and some business owners feel the restrictions on income splitting with children are reasonable for those at least under the age of majority.

Taxation of Passive Income


As noted in my July 24th blog post, where a corporation earns less than $500,000 the company pays tax at 15% in Ontario and a similar amount in each province. This results in a tax deferral, not a tax saving of up to 38%. Where corporations earn income in excess of $500,000, or in the case of many professional corporations where access to the small business exemption is limited (they must share the $500k exemption with all their partners), the tax rate is 26.5% in Ontario and similar in most provinces, resulting in a tax deferral of 27% or so. The proposals effectively eliminate the tax deferral for all income not re-invested back into the active business.

I would say these rules have antagonized small business owners, professionals and tax advisors the most and there is unanimous consent these rules are not required and unnecessarily punitive. The reasons for this are as follows:

1. Unlike the income splitting and capital gains stripping rules, in general, these rules only result in a deferral of income tax, not an absolute saving.

2. This deferral has been used extensively by small business owners and professionals to create their own retirement fund. The fact that the government is considering removing the ability to save for retirement within a corporation has many people going apoplectic. The reason for this is essentially twofold. Firstly, business owners are furious the government is not providing any benefit for the risk they take for starting and owning a business and secondly, they look at government employees with gold plated pension plans and ask what right does the government have to prevent them from trying to create their own retirement fund?

3. Any new rules will be unbelievably complex and expensive for the business owners and advisors to administrate, especially given there is only a tax deferral and not an absolute tax savings. How do you track excess income earned between corporate use and passive use when they are often intermingled in some manner?

I have found that when you take emotion out of this issue, there is some agreement that the capital gains stripping and income splitting with children proposals were fair. However, the other proposals are considered prejudicial against high income earners, punitive, complex and totally ignore the risk that business owners must accept in starting a business. Finally, I think the Liberals are missing a very important consideration: that being mindset. When you tax people at 53% and restrict the benefits to start a business, you stunt business growth, create more underground transactions, and cause some of your best and brightest to leave the country. This does not even consider the massive spending power you are taking out of the economy by reducing the discretionary income of typically the highest spending Canadians.

Update


A couple important updates, one on this topic and one on the work-in-progress transition period announced in the 2017 Federal Budget.

In this editorial by the Finance Minister in The Globe and Mail, Mr. Morneau states the following " For those business owners and professionals who have saved and planned for their retirement under the existing rules, I want to be clear: We have no intention of going back in time. Our intent is that changes will apply only on a go-forward basis and neither existing savings, nor investment income from those savings, will be touched". This statement at least clarifies the passive income rules will at worst be go forward rules.

In this March, 2017 blog post on the federal budget, I discussed that professionals would no longer be allowed to deduct their work-in-progress ("WIP") from their taxable income and their current WIP deduction would be subject to a two year addback transition period (2018 & 2019) that would result in harsh income tax consequences for many. Late last week the government released draft legislation regarding the 2017 budget proposals and they have changed the transition period for WIP that has to be brought into taxable income to 5 years (20% a year starting in 2018 through 2022) from the initial two year proposal.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, September 4, 2017

The Best of The Blunt Bean Counter - The Duties of an Executor

This summer I am posting the "best of" The Blunt Bean Counter blog while I work on my golf game. Today, I am re-posting a blog post from April 2011, on the duties of an executor. As the 86 comments on the initial post reflect, many people are oblivious to these duties, until they are suddenly thrust upon them. This is the last "Best of" for this year, I return next week with my regular newly minted blog posts.

The Duties of an Executor


 As I noted in the first installment of this series, I have been an executor for three estates. I have also advised numerous executors in my capacity as the tax advisor/accountant for the estates of deceased taxpayers. The responsibility of being named an executor is overwhelming for many; notwithstanding the inexcusable fact many individuals appointed as executors had no idea they were going to be named an executor of an estate. In my opinion, not discussing this appointment beforehand is a huge mistake. I would suggest at a minimum, you should always ask a potential executor if they are willing to assume the job (before your will is drafted), but that is a topic for another day.

So, John Stiff dies and you are named as an executor. What duties and responsibilities will you have? Immediately you may be charged with organizing the funeral, but in many cases, the immediate family will handle those arrangements, assuming there is an immediate family in town. What’s next? Well, a lot of work and frustration dealing with financial institutions, the family members and the beneficiaries.

Below is a laundry list of many of the duties and responsibilities you will have as an executor:

  • Your first duty is to participate in a game of hide and seek to find the will and safety deposit box key(s).  If you are lucky, someone can tell you who Mr. Stiff's lawyer was and, if you can find him or her, you can get a copy of the will. Many people leave their will in their safety deposit box; so you may need to find the safety deposit key first, so you can open the safety deposit box to access the will.
  • You will then need to meet with the lawyer to co-coordinate responsibilities and understand your fiduciary duties from a legal perspective. The lawyer will also provide guidance in respect of obtaining a certificate of appointment of estate trustee with a will ("Letters Probate"), a very important step in Ontario and most other provinces. 
  • You will then want to arrange a meeting with Mr. Stiff's accountant (if he had one) to determine whether you will need his/her help in the administration of the estate or, at a minimum, for filing the required income tax returns. If the deceased does not have an accountant, you will probably want to engage one. 
  • Next up may be attending the lawyer’s office for the reading of the will; however, this is not always necessary and is probably more a "Hollywood creation" than a reality. 
  • You will then want to notify all beneficiaries of the will of their entitlement and collect their personal information (address, social insurance number etc).
  • You will then start the laborious process of trying to piece together the deceased’s assets and liabilities (see my blog Where are the Assets for a suggestion on how to make this task easy for your executor). 
  • The next task can sometimes prove to be extremely interesting. It is time to open the safety deposit box at the bank. I say extremely interesting because what if you find significant cash? If you do, you then have your first dilemma; is this cash unreported, and what is your duty in that case? 
  • It is strongly suggested that you attend the review of the contents of the safety deposit box with another executor. A bank representative will open the box for you and you need to make a list on the spot of the boxes contents, which must then be signed by all present.
  • While you are at the bank opening the safety deposit box, you will want to meet with a bank representative to open an estate bank account and find out what expenses the bank will let you pay from that account (assuming there are sufficient funds) until you obtain probate. Most banks will allow funds to be withdrawn from the deceased’s bank account to pay for the funeral expenses and the actual probate fees. However, they can be very restrictive initially and each bank has its own set of rules. 
  • As soon as possible you will want to change Mr. Stiff's mailing address to your address and cancel credit cards, utilities, newspapers, fitness clubs, etc. 
  • As soon as you have a handle on the assets and liabilities of the estate, you will want to file for letters of probate, as moving forward without probate is next to impossible in most cases. 
  • You will need to advise the various institutions of the passing of Mr. Stiff and find out what documents will be required to access the funds they have on hand. In one estate I had about 10 different institutions to deal with and I swear not one seemed to have the exact same informational requirement. 
  • If there is insurance, you will need to file claims and make claims for things such as the CPP benefit. 
  • You will need to advertise in certain legal publications or newspapers to ensure there are no unknown creditors; your lawyer will advise what is necessary.
  • It is important that you either have the accountant track all monies flowing in and out of the estate or you do it yourself in an accounting program or excel. You may need to engage someone to summarize this information in a format acceptable to the courts if a “passing of accounts” is required in your province to finalize the estate. 
  • You will also need to arrange for the re-investment of funds with the various investment advisor(s) until the funds can be paid out. For real estate you will need to ensure supervision and/or management of any properties and ensure insurance is renewed until the properties are sold. 
  • A sometimes troublesome issue is family members taking items, whether for sentimental value or for other reasons. They must be made to understand that all items must be allocated and nothing can be taken.  
  • You will need to arrange with the accountant to file the terminal return covering the period from January 1st to the date of death. Consider whether a special return for “rights and things” should be filed. You may also be required to file an “executor’s year” tax return for the period from the date of death to the one year anniversary of Mr. Stiff's death. Once all the assets have been collected and the tax returns filed, you will need to obtain a clearance certificate to absolve yourself of any responsibility for the estate and create a plan of distribution for the remaining assets (you may have paid out interim distributions during the year).
The above is just a brief list of some of the more important duties of an executor. For the sake of brevity I have ignored many others (see Jim Yih's blog for an executor's checklist).

The job of an executor is demanding and draining. Should you wish to take executor fees for your efforts, there is a standard schedule for fees in most provinces. For example in Ontario, the fee is 2.5% of the receipts of estate and 2.5% of the disbursements of the estate.

Finally, it is important to note that executor fees are taxable as the taxman gets you coming, going and even administering the going.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, August 28, 2017

The Best of The Blunt Bean Counter - Are you Selfish with your Money and Advice?

This summer I am posting the "best of" The Blunt Bean Counter blog while I work on my golf game. Today, I go way back to July 2012, for a post on whether you are selfish with your money and advice.

Are you Selfish with your Money and Advice?


I think it is commonly accepted that most people do not like to discuss money matters. In fact, I have posted on several taboo money topics ranging from discussing the family will to intergenerational issues surrounding money. I find the fact that people are not willing to discuss money quite ludicrous in some cases and potentially harmful in certain other situations.

But, should this disinclination to discuss money extend to investment or cost saving opportunities where you may be able to financially assist family, friends and acquaintances? Are there situations in which you do not have to reveal personal financial details, such that one can disengage from the money taboo?

So, where am I going with this? Let me ask you the following questions:
  1.  If you are a stock picker and have a new favourite stock, would you inform your family, friends and acquaintances about this stock?
  2. What if you found a great cottage to rent this summer at a great price, but you can only use it two weeks of the summer, would you inform your family or friends of its availability?
  3. What if someone came to you with a private investment which you thought was the next Facebook, would you offer this opportunity to your family, friends, acquaintances or clients?
  4. What if you found a great real estate property you felt could be fixed-up cheaply and flipped quickly, but you would be stretched to purchase it yourself. Would you offer a piece of this property to your family or friends?
  5. Finally, what if you have a client or contact who is a distributor for Armani suits for men and Christian Louboutin shoes for women and they offer you a standard 50% discount and allow you to bring a guest, would you bring a guest?
Personally, I would answer yes to all the above and not think much about doing such. To me, if I can make money and also help someone make money or save money, I am happy to share the wealth, so to speak. In fact, I have done all the above in some shape or form. This does not make me a good person, I have several other faults; but I am just not selfish where I can share the spoils of a good investment or opportunity. 

However, some people are not as forthcoming. The question is why?

I see a couple of potential reasons.

The first and most justifiable reason is that although many people are willing to take a personal financial risk on a stock pick or investment opportunity, they do not want to be held responsible if others lose their money. I think this is a very valid concern. The only counter argument I have for this concern is if you know your family and friends well, you probably know to which people you can say, "Here is the opportunity and here is the risk. You are a big boy or big girl, make your own decision, but I am partaking in this investment and if you follow suit, you do so with the same risk I have assumed".

I would suggest for the people in the subset above, most would probably inform family or friends about the cottage rental opportunity and Armani suits/ Christian Louboutin shoe sale, because in these cases, there is no risk of financial loss and blame, as you are just helping others save money.

This leads me to an alternative reason for not “sharing” investment opportunities or cost saving opportunities. Many months back I wrote a blog post called “How we look at money”. The post centered on a study by Dr. Brad Klontz a financial psychologist.
The study which deals with money through a concept of “money scripts” says money causes certain people to be “concerned with the association between self-worth and net-worth. These scripts can lock individuals into the competitive stance of acquiring more than those around them. Individuals who believe that money is status see a clear distinction between socio-economic classes.”


I would suggest it is this subset of people that do not involve or inform others of these investments and cost saving opportunities. Their actions are a result of their competitiveness in acquiring more than those around them, such that they feel more powerful with the exclusivity of being involved in these opportunities while excluding their family and friends.

These people feel that if their investments work out, they will have more money than their family,  friends and acquaintances and reinforce their financial superiority. In the case of the cottage they would not let others know about the deal they received, yet they would invite guests to the cottage to show it off. The same would go for the suits or shoes; they would rather show up in the Armani suit or Christian Louboutin shoes to reinforce their perceived power and status and would not want others to present the same image.

As I have stated on numerous occasions, I find the psychology of money intriguing. Think how you and the people you know would respond to the above five situations and whether these situations would provide a view into your/their financial psyches.

P.S.-- Just so none of my family and friends think they were the inspiration for this blog post, it is based on "Someone that I Used to Know" as music artist Goyte would say.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Monday, August 21, 2017

The Best of The Blunt Bean Counter - Transferring the Family Cottage - Part 3

In the final post of my three-part blog series on transferring the family cottage, I discuss some of the alternative strategies available to mitigate or defer income taxes that may arise upon the transfer of the cottage to your children. Unfortunately, none provide a tax "magic bullet".

Part 3 – Ways to Reduce the Tax Hit


The following alternatives may be available to mitigate and defer the income taxes that may arise on the transfer of a family cottage.

Life Insurance

Life insurance may prevent a forced sale of a family cottage where there is a large income tax liability upon the death of a parent, and the estate does not have sufficient liquid assets to cover the income tax liability. The downside to insurance is the cost over the years, which can be substantial. In addition, since the value of the cottage may rise over the years, it may be problematic to have the proper amount of life insurance in place (although you can over-insure initially or if your health permits, increase the insurance at a later date). I would suggest very few people imagined the quantum of the capital gains they would have on their cottages when they initially purchased them, so guessing at the adequate amount of life insurance required is difficult at best.

Gift or Sale to Your Children

As discussed in Part 2, this option is challenging as it will create a deemed capital gain, and will result in an immediate income tax liability in the year of transfer if there is an inherent capital gain on the cottage. The upside to this strategy is that if the gift or sale is undertaken at a time when there is only a small unrealized capital gain and the cottage increases in value after the transfer, most of the income tax liability is passed on to the second generation. This strategy does not eliminate the income tax issue; rather it defers it, which in turn can create even a larger income tax liability for the next generation. Since many cottages have already increased substantially in value, a current sale or transfer to your children will create significant deemed capital gains, making this strategy problematic in many cases.

If you decide to sell the cottage to your children, the Income Tax Act provides for a five-year capital gains reserve, and thus consideration should be given to having the terms of repayment spread out over at least five years.

Transfer to a Trust

A transfer of a cottage to a trust generally results in a deemed capital gain at the time of transfer. An insidious feature of a family trust is that while the trust may be able to claim the Principal Residence Exemption ("PRE"), in doing so, it can effectively preclude the beneficiaries (typically the children) of the trust from claiming the PRE on their own city homes for the period the trust designates the cottage as a principal residence.

This paragraph is an update to the original 2011 post. A reader of the blog recently asked a question on life and remainder interests in a cottage. When gifting or using a trust, you can transfer ownership of your cottage to your children, while still keeping a "life interest" in the cottage, which allows you continued use of the cottage and the income from the property (if any) for the rest of your life. However, the transfer/gift to the trust still triggers a capital gain for tax purposes. You are essentially just ensuring you have access and use of your cottage and the future increase in the cottage value accrues to your children from the date of the transfer. This is a complicated topic and beyond my area of expertise. You should consult your lawyer in tandem with your accountant to ensure you understand the issues in your specific situation in using a life transfer and remainder interest.

If a parent is 65 years old or older, transferring the cottage to an Alter Ego Trust or a Joint Partner Trust is another alternative. These trusts are more effective than a standard trust, since there is no deemed disposition and no capital gain is created on the transfer. The downside is that upon the death of the parent, the cottage is deemed to be sold and any capital gain is taxed at the highest personal income tax rate, which could result in even more income tax owing.

The use of a trust can be an effective means of sheltering the cottage from probate taxes. Caution is advised if you are considering a non-Alter Ego or Joint Partner Trust, as on the 21-year anniversary date of the creation of the trust, the cottage must either be transferred to a beneficiary (should be tax-free), or the trust must pay income taxes on the property’s accrued gain.

Transfer to a Corporation

A cottage can be transferred to a corporation on a tax-free basis using the rollover provisions of the Income Tax Act. This would avoid the deemed capital gain issue upon transfer. However, subsequent to the transfer the parents would own shares in the corporation that would result in a deemed disposition (and most likely a capital gain) upon the death of the last surviving parent. An “estate freeze” can be undertaken concurrently, which would fix the parent’s income tax liability at death and allow future growth to accrue to the children; however, that is a topic for another time.

In addition, holding a cottage in a corporation will result in a taxable benefit for personal use and will eliminate any chance of claiming the PRE on the cottage for the parent and children in the future so this alternative is rarely used.

In summary, where there is a large unrealized capital gain on a family cottage, there will be no income tax panacea. However, one of the alternatives noted above may assist in mitigating the income tax issue and allow for the orderly transfer of the property.

I strongly encourage you to seek professional advice when dealing with this issue. There are numerous pitfalls and issues as noted above, and the advice above is general in nature and should not be relied upon for specific circumstances.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, August 14, 2017

The Best of The Blunt Bean Counter - Tranferring the Family Cottage - Part 2

In the second installment of my April, 2011 three-part series on transferring the family cottage, I discuss the income tax implications of transferring or gifting a cottage to your children. Many people are unaware these gifts or sales, often create an immediate income tax liability.  

Part 2 – Tax Issues


As discussed in Part 1 of this series, you can only designate one property as a principal residence per family after 1981. In order to explore the income tax implications associated with transferring ownership of a cottage, I will assume both a city residence and a cottage have been purchased subsequent to 1981, and I will assume that the PRE has been fully allocated to your city home and the cottage will be the taxable property.

Many parents want to transfer their cottage to their children while they are alive, however any gift or sale to their children will result in a deemed capital gain under the Income Tax Act equal to the fair market value (“FMV”) of the cottage, less the original cost of the cottage, plus any renovations to the cottage. Consequently, a transfer while the owner-parent(s) is/are alive will create an income tax liability where there is an unrealized capital gain (i.e. Your cottage is worth $500,000 and the cost is $200,000, you will have a $300,000 capital gain even though you did not actually sell the cottage).

Alternatively, where a cottage is not transferred during one parent’s lifetime and the cottage is left to the surviving spouse or common-law partner, there are no income tax issues until the death of the surviving spouse/partner. However, upon the death of the surviving spouse/partner, there will be a deemed capital gain, calculated exactly as noted above. This deemed capital gain must be reported on the terminal (final) tax return of the deceased spouse/partner.

Whether a gift or transfer of the cottage is made during your lifetime, or the property transfers to your children through your will, you will have the same income tax issue: a deemed disposition with a capital gain equal to the FMV of the cottage, less its cost.

It is my understanding that all provinces (with the exception of Alberta, Saskatchewan, and parts of rural Nova Scotia) have land transfer taxes that would be applicable on any type of cottage transfer. You should confirm whether land transfer tax is applicable in your province with your real estate lawyer.

So, are there any strategies to mitigate or alleviate the income tax issue noted above? In my opinion, other than buying life insurance to cover the income tax liability, most strategies are essentially ineffective tax-wise as they only defer or partially mitigate the income tax issue. In Part 3 of this series I will summarize the income tax planning options available to transfer the family cottage.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, August 7, 2017

The Best of The Blunt Bean Counter - Transferring the Family Cottage - Part 1

In April 2011, I wrote a  three-part series on transferring the family cottage for the Canadian Capitalist blog. Since many Canadian's are at their cottage and the topic is apropos, I will re-post the blogs over the next three weeks,

Part 1 deals with the historical nature of the income tax rules, while Part 2 will deal with the income tax implications of transferring or gifting a cottage, and finally in the third post, I discuss alternative income tax planning opportunities that may mitigate or defer income tax upon the transfer of a family cottage.

Part 1 – There Is No Panacea


Canadians love their cottages. They are willing to put up with three-hour drives, traffic jams, never-ending repairs and maintenance, and constant hosting duties for their piece of tranquility by the lake. However, I would suggest the family cottage is one of the most problematic assets for income tax planning purposes, let alone the inherent family politics that are sure to arise.

For purposes of this discussion, I will just assume away the family politics issue. I will assume the children will each grab a beer, sit down at a table, and work out a cottage-sharing schedule to everyone’s satisfaction; and while they are at it, agree on how they will share the future ownership of the cottage when their parents transfer the cottage or pass away. I would say this is a very realistic situation in Canada, not!!!

Let’s also dismiss any illusions some may harbour that they can plan around the taxation issues related to cottages (or even avoid them entirely). I can tell you outright that there is no magical solution to solving the income tax issues in regard to a family cottage, just ways to mitigate or defer the issues. Many cottages were purchased years ago and have large unrealized capital gains.

So let’s start by taking a step back in time. Up until 1981, each spouse could designate their own principal residence (“PR”) which, in most cases, made the income tax implications of disposing or gifting a family cottage a null and void issue. The “principal residence exemption” (“PRE”) in the Income Tax Act essentially eliminated any capital gain realized when a personal use property was sold or transferred. Families that had a home in the city and a cottage in the country typically did not have to pay tax on any capital gains realized on either property when sold or gifted.

However, for any year after 1981, a family unit (generally considered to be the taxpayer, his or her spouse or common-law partner, and unmarried minor children) can only designate one property between them for purposes of the PRE. Although the designation of a property as a PR is a yearly designation, it is only made when there is an actual disposition of a home (New rules have been put in place in respect to selling your PR, see this blog I wrote on the topic in Oct, 2017).

For example, if you owned and lived in both a cottage and a house between 2001 and 2011 and sold them both in 2011, you could choose to designate your cottage as your PR for 2001 to 2003 and your house from 2004 to 2011, or any other permutation plus one year (the Canada Revenue Agency [“CRA”] provides a bonus year because they are just a giving agency).

In order to decide which property to designate for each year after 1981, it is always necessary to determine whether there is a larger gain per year on your cottage or your home in the city. Once that determination is made, in most cases it makes sense to designate the property with the larger gain per year as your personal residence for purposes of the PRE. 

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.