Four tax planning ideas for your cottage
As the end of summer draws near and routine preparations for closing the cottage begin, the thought of one day selling or transferring the cottage to family members may cross your mind. In thinking about how you might do that and how taxes will affect your future plans, there may be some relief in knowing certain strategies are available to you and your family that can minimize, defer and help plan for the inevitable tax arising when you sell or transfer your cottage.
- Reduce taxes on capital gains by utilizing the principal residence exemption.
The principal residence exemption can be applied to reduce capital gains tax on a home you ordinarily inhabit, which does not have to be your main residence. Please note that this exemption requires a designation of a property as a principal residence, and only one property can be designated per year. Therefore, consider whether it makes sense to use the principal residence exemption on your cottage or whether to preserve all or a portion of this exemption for another property which may have a higher inherent gain, such as the family home.
- Check valuation day for cottages owned before 1972.
Prior to 1972 capital gains were not subject to tax. You may have elected to adjust the cost base of your cottage to its fair market value as of “Valuation Day” on December 31, 1971. This could potentially reduce your capital gain as your cost basis for tax purposes would be higher than the amount originally paid. Check your records to see if this election was made.
- Keep track of your capital expenses.
Over the course of cottage ownership, it is likely you have made additions or improvements to the property. These capital expenses can increase the cost base of your cottage and reduce your capital gain exposure on sale, transfer, or death. Capital expenses are limited to those that provide a lasting benefit; costs for regular maintenance and repairs do not increase the cost base of your property. It is important to keep good records of your capital expenses and store them in a safe place to reduce your tax bill later.
- Beware of cottages held in trusts.
In the past, trusts which held real property were able to access the principal residence exemption, however recent tax changes have restricted the use of the exemption to certain types of personal trusts, specifically qualified disability trusts and trusts for minors. If your family cottage is held in a trust, it may be possible to roll-out the property to a capital beneficiary who can claim the exemption personally.
Interested in reading the full article?
Contact us for our Tax and Estate Planning education article: Cottage succession. We also have articles that take a deeper dive into the selling a business and capital gains exemptions.
Your cottage may be a gathering place for family and your personal sanctuary of memories.
In considering ways to maintain the cottage for your family, or to reduce potential taxes on sale or upon death, your Advisor can assist you in developing strategies to prepare for a successful cottage transition. Contact us if you would like more information on cottage succession planning.