"The biggest tax problem with vacation properties, such as a cottage, is the potential for large capital gains tax if the property is sold, gifted to family members, or held upon the owner's death," says
In his recently updated report,
Improvements and renovations - It's important to keep receipts for any improvements or renovations made to the property, as these expenditures can be added to the property's adjusted cost base, thereby reducing the amount of capital gains tax payable upon sale, gift or death.
Principal Residence Exemption -The principal residence exemption ("PRE") can shelter the gain on a principal residence from capital gains tax. Although a couple can only designate one property as their principal residence during any given calendar year, the property does not have to be located in
Trusts - Trusts are commonly used to hold or purchase a vacation property because they prevent the 'deemed disposition' of a property upon death, potentially deferring capital gains tax until the trust's beneficiaries - generally the children - sell or gift the property.It should be noted that transferring a property into a trust triggers immediate capital gains tax if applicable.
PRE and trusts - The beneficiary of a family trust who receives a vacation property from the trust is deemed to have owned that property from the date the trust acquired it. This allows the beneficiary to use the PRE to shelter the gain from the date of original purchase or transfer into the trust - assuming the beneficiary didn't own another principal residence during the same period.
Gifting - Parents may wish to give a vacation property to adult children while the parents are still alive - even if they plan to enjoy it for many more years. While the parents will need to pay up now for the capital gains tax accrued to date, future capital gains will accrue to the children, who may be able to use their own PRE to avoid taxation.
Life insurance - You can purchase a permanent life insurance policy to offset a property's tax liability upon death. Even in provinces with relatively low tax rates, the cost of insurance often compares favourably to the cost of paying the capital gains tax upon disposition, even if that's many years away.
All tax and estate-planning strategies have pros and cons and may be complicated to implement. It is important to consult a qualified accountant or tax lawyer on all tax or estate-planning matters.
PDF available at: http://stream1.newswire.ca/media/2014/05/15/20140515_C8555_DOC_EN_40355.pdf
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