Tax Implications of Selling or Gifting Your Cottage to a Family Member

Allan Madan, CA
 Oct 27, 2014
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Before being overly generous, consider the tax implications of selling or gifting your cottage to family.


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There are tax implications when you sell or gift your cottage to a family member. In fact, a gift or a sale will trigger a taxable capital gain.

This gain is calculated as the difference between the purchase price when you bought the property and its fair market value or selling price when you gift or sell it.

There are four ways that you can reduce the capital gain on transferring your cottage to a family member

  1. Claim the principle residence exemption. If you can establish that you regularly and routinely occupy the cottage, then you can claim the principle residence exemption. This exemption allows for the tax-free transfer, whether by gift or sale to a family member.
  2. Maximize the adjusted cost base or ACB of your cottage. In simple terms, the ACB of a property is its original purchase price. However, improvements made, like installing a new roof or flooring increase the ACB. The higher the ACB the lower the gain will be when you eventually gift or sell your cottage. Make sure you have receipts to back up the improvements you are claiming.
  3. Instead of giving your cottage to your children for free, consider selling it to them for its fair market value. Here is the trick, spread the payments owed to you over a period of five years. When you do this, the CRA allows you to claim a capital gains reserve, which effectively allows you to spread the capital gain over a five year period. This is a win-win situation, your taxes are reduced and your kids have more flexibility in paying you back.
  4. Leave your cottage to your spouse in your will. Assets transferred to a spouse are not subjected to capital gains tax upon your death.

So here’s the tip: before selling or gifting your cottage to family members, consider these four ways to reduce your capital gains tax.

Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.

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Comments 2

  1. We are Canadian planing to gift our condo in San Diego to our grandson, US resident. The condo appreciated in value about $100.000 ..We rented condo every year for several months and we did reported income to US and Canada..We never claim depreciation on property. What are tax implication to us and to our grandson who is US resident?

    1. Hi Mirjana,

      For Canadian tax purposes, there will be a deemed sale when you give the property to your grandson by way of a gift. The deemed selling price is equal to the fair market value of the property on the date of the gift. As a result, a capital gain will be triggered and one half of the capital gain will be included in your income in the year that the gift is made. Based on the information provided, the taxable capital gain is equal to $50,000 ($100,000 x 1/2).

      For US tax purposes, you will not pay capital gains tax when the gift is made. In addition, the cost amount to your grandson of the condo will remain the same (original purchase price). Your grandson will pay capital gains tax to the IRS when he sells the condo.

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