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

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