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, 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.