Tax implications of selling or gifting a family cottage

Before being overly generous, consider the tax implications of selling or gifting your cottage to family.

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.

ABOUT THE AUTHOR

ALLAN MADAN

CPA, CA

Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.

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