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  • Adding names to a cottage deed could result in big tax bills

    Adding names to a cottage deed could result in big tax bills

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    You mention that the cottage deed is in your name only right now. That suggests that it was either in your name all along or that the cottage was owned jointly with your husband with right of survivorship. I suspect it was held jointly with right of survivorship, meaning that it was transferred directly to you on your husband’s death. That means that it passed outside of his will regardless of his wishes contained therein.

    Ask a Planner: Leave your question for Jason Heath »

    Are there capital gains on inheriting a cottage?

    Sometimes the ownership structure of an asset trumps a will, and this may be a case of that, Jill. When an asset passes to a surviving spouse on death, by default, it is transferred at its adjusted cost base for tax purposes, meaning no capital gains tax is payable at that time. The executor can elect to have some or all of the capital gain taxed on the final tax return of the deceased, if it’s advantageous to do so, but let’s assume this didn’t happen. This means that all the accumulated capital gains have been passed along to you and this is important as it relates to the next steps you take with the cottage.

    Do you have to share an inherited cottage?

    You may not have a legal obligation to include your three stepchildren in the ownership of the cottage, Jill, since the cottage passed outside the will due to joint ownership. If you are in doubt, you should seek legal advice. It sounds like there is at the very least a moral obligation to include your stepchildren in the ownership, but it will result in a gift to your husband’s children—and therefore has tax implications.

    Beneficiary of taxes

    Because the accumulated capital gains have all been passed along to you, if you gift three-quarters of the cottage to them, you will personally have a capital gains tax liability in the year of transfer. Some people think they can skirt the capital gains tax by making the gift for $1 or for a value equal to the cost, but that’s not the case in Canada. The transfer in ownership needs to happen at the fair market value, meaning the appraisal you suggested may be relevant, Jill. An appraisal is not mandatory when determining the fair market value for a transfer but may be advisable.

    Assuming you have sufficient resources to pay the capital gains tax, you may not be worried. But the capital gains tax bill could be a big one if you’ve owned the cottage for a long time.

    Keep in mind there are options. You could treat the cottage as your principal residence, with the transfer to your stepchildren, therefore being tax-free. But this would expose your house in the city to capital gains tax on the sale of it or upon your own death.

    You need to weigh the pros and cons of paying tax today versus deferring it to determine, if this is advantageous to use the principal residence exemption for the cottage. You may also be limited in doing so if you had a previous principal residence that you sold during the time you have owned the cottage and you treated it as your principal residence, with no capital gains tax payable. This would negate the years you owned the cottage and claimed another principal residence exemption.

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    Jason Heath, CFP

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  • Tax deductible expenses when selling a cottage

    Tax deductible expenses when selling a cottage

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    There are a number of expenses that can be claimed to reduce the capital gain on your cottage, Louise. Capital expenses are an example. The Canada Revenue Agency (CRA) defines a capital expense as an expense that:

    • Gives a lasting benefit or advantage;
    • improves the existing property;
    • is a separate asset; or
    • is considerable in relation to the value of the property.

    Capital gain vs capital expense for the costs of owning and selling a cottage

    There’s a distinction between a capital expense—which increases your cost base and reduces your capital gains tax on a property—and a current expense, which is a repair. Repairs are only tax deductible when a property is used for rental or business purposes against the income earned but have no impact on capital gains.

    In your case, Louise, a good example of a capital expense would be your expense to change a shingle roof to a metal one. In particular, it provides a lasting benefit, is an improvement to the existing roof, and is considerable in value.

    The windows and flooring also provide a lasting benefit. The stove is a separate asset, in its own right. So, these three expenses would also generally be capital expenses that would be added to the cost of the property for capital gains tax purposes.

    What is a capital gain?

    A capital gain is the increase in value on any asset or security since the time it was purchased, and it is “realized” when the asset or security is sold. (Similarly, a capital loss is realized when you sell an asset that has decreased in value since the time of purchase.) Capital gains (or losses) can happen on stocks, mutual funds and real estate. 

    Read more about capital gains in the MoneySense Glossary: “What are capital gains?”

    Is replacing a cottage deck a capital expense?

    The replacement of the old deck and stairs may not be a capital expense, Louise. In fact, the CRA gives a specific example on their website of an expense for wooden steps being a current expense. If you were to replace wooden steps with concrete steps, that would be a capital expense. If you were to repair wooden steps, it would not be a capital expense. It would be a current expense or repair as opposed to a renovation or improvement. So, whether the deck and stair expenses are capital or current would be a matter of fact depending on the exact nature of the work.

    Note that the CRA does not give a specific list of capital expenses, but rather, guidelines for determining the nature of the expense.

    Cottages for sale: What happens if you have a capital gain?

    The calculation of your cost base for tax purposes will then be equal to your original purchase price, closing costs on acquisition, and capital expenses over the years. The proceeds, less the selling costs, less your cost base gives you your capital gain. Half of your capital gain is taxable on your tax return in the year of sale, or two thirds if the capital gain in excess of $250,000 in a given year for a taxpayer. A large capital gain in a high income year could give rise to 25% tax or more depending on your province of residence, income sources, and the magnitude of your capital gains for the year.

    Read more about owning a cottage:




    About Jason Heath, CFP

    Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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    Jason Heath, CFP

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