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. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

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. Please note the blog post is time sensitive and subject to changes in legislation or law.

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