Succession Planning for your Cottage
Tax Considerations for your Vacation Property
By Susan Gottlieb
Vacation properties go by many names: cottage, chalet, camp, cabin or secondary home, for example. For many Canadians, regardless of what you specifically call it, these types of vacation properties are a source of great personal enjoyment. Some owners may feel strongly about keeping their vacation property within the family, and if that’s the case, it’s important to consider how best to transfer ownership to younger family members. This article reviews various tax implications and strategies that can be used in passing ownership of your vacation property to the next generation.
There are several tax and non-tax issues to consider when planning to transfer a vacation property to your beneficiaries, especially if more than one beneficiary is involved. From a tax perspective, the two main aspects to consider are capital gains tax and probate fees (Note that probate fees are not generally a factor in Quebec and Alberta.)
This article does not address Goods and Services Tax (GST)/ Harmonized Sales Tax (HST), Land Transfer Tax (LTT), or U.S. vacation properties. LTT rules vary by jurisdiction. If you own a vacation property in the U.S., please ask for our article, Owning and renting property in the U.S.
Any reference to a spouse in this article also includes a common-law partner.
Tax considerations Capital gains tax – One of the main considerations when estate planning for your vacation property is the income tax liability you may face on death with respect to the property. This may be a concern if your vacation property has appreciated in value since the date you acquired the property. In general, when you pass away, you are deemed to dispose of your capital property, including your vacation property, at fair market value (FMV). The amount by which the FMV of the property exceeds the ACB of the property on the date of death is the capital gain. Of that gain, 50% is taxable on your final tax return at your marginal tax rate. An exception to the deemed disposition rules occurs when the property is transferred to a spouse or a qualified spousal trust. When this is the case, the property is deemed to automatically “roll over” to the other spouse or qualified spousal trust at its ACB and no gain will be immediately reportable. Please note that if you realize a capital loss on personal-use property, the loss is generally denied.
In reviewing different planning options for the transfer of ownership of your vacation property, you may want to consider strategies that may defer or reduce the capital gains tax liability that you may face on death.
Determine the ACB of your vacation property – In order to get a better sense of what your potential capital gains tax exposure may be with respect to your vacation property on the sale or transfer or on your death, you must first determine the ACB of the property.
The ACB of your vacation property will normally be the purchase price plus any expenses to acquire it, such as commissions and legal fees. If you acquired the property by gift or inheritance, the ACB of your vacation property will generally be the FMV on the date you acquired the property.
The ACB of a property also includes capital expenditures, such as the cost of additions and improvements to the property. It is important that you keep documentation to substantiate the costs for improvements and renovations made to the property.
There are also some unique tax events that may impact the calculation of your ACB. Capital gains only became taxable in Canada from 1972 onwards. As such, if you owned your vacation property since before 1972, the starting point for calculating your ACB is generally the FMV of the property on December 31, 1971.
In addition, in 1994, the federal government eliminated the $100,000 lifetime capital gains exemption. Taxpayers were allowed the opportunity to file a special tax election to “crystallize” previously unrealized gains on capital property in order to utilize any remaining capital gains exemption. The election allowed you to bump the ACB of your capital property, such as real estate, to its FMV or the $100,000 limit, whichever amount was greater. The election was a one-time opportunity and while you can’t claim the exemption now, it’s a good idea to check if the election was filed with respect to your vacation property.
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