Handing Down the Cottage – Part 3

Handing down the cottage is a challenge facing many families in the South Georgian Bay area where many properties are secondary homes for their owners.  Recently, I had the privilege of spending some time with Geoff Parker of Stonehaven Financial Group Inc. discussing some of the various issues surrounding succession planning for such properties.  Geoff kindly agreed to share this information with my readers which is presented as a four part series.  Read Part 1 and Part 2 here.

Taxation of a capital gain is part of any investment that increases in value when it is sold. And a cottage is no exception. When you decide to transfer/sell all or part of the ownership of your cottage to a family member other than a spouse, a capital gain is realized.. At that time half of any gain in value would be added to your income for the taxation year in which the transfer/sale occurs.

Two strategies you can employ to potentially reduce tax payable are a timed transfer and the principal residence election.

With a timed transfer you sell your cottage to your family over a period of five years. This enables you to recognise the total gain in smaller increments, approximately 20% per year, potentially reducing the overall tax payable. It does require that a separate evaluation be undertaken each year.

If your family cannot afford to buy the cottage from you, and you can afford to do so, you can also take back an interest free mortgage. Essentially you sell them 20% each year and take back a mortgage for the 20%. At the end of the five years they own the cottage and you have a mortgage for the full value of the cottage. Then in your will you forgive the mortgage. The additional advantages of this strategy are the possible elimination of any potential creditor or matrimonial claims.

The Government of Canada allows anyone to claim as their principal residence, for any given year, any property that they ordinarily inhabit. Consequently, you are able to claim for tax purposes either your home or your cottage as your principal residence. You would elect the property having the largest absolute gain for a given year as your principal residence. The objective is to effect an election that reduces the overall capital gain and therefore the tax. Keep in mind you must make the election at the time you sell or transfer the ownership of one or both of your properties.

Both of these strategies require the assistance of a tax specialist. You only need to mention you would like to explore a timed transfer and the principal residence election. If your accountant is knowledgeable, they will be able to take your request and report back to you. If they scratch their head and look perplexed, find yourself another accountant.

In the final week, strategies for funding the transfer will be detailed.

If you have any questions for Geoff about ownership structures or cottage succession planning, please feel free to email him at geoffrey@stonehaven-group.ca or contact him via  his website at www.geoffreyparker.ca.

This article was prepared by Geoffrey Parker who is an Investment Advisor & Certified Financial Planner with Dundee Securities Corporation., a DundeeWealth Inc. Company. This is not an official publication of Dundee Securities Corporation and the author is not a Dundee Securities analyst. The views (including any recommendations) expressed in this article are those of the author alone, and they have not been approved by, and are not necessary those of Dundee Securities Corporation.