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Tag: inclusion rate

  • Tax implications of adding a child’s name to your rental property – MoneySense

    Tax implications of adding a child’s name to your rental property – MoneySense

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    Gifting some or all of a rental property

    The act of adding a name to a property itself does not give rise to capital gains tax. There’s a distinction between legal ownership (whose name is on title) and beneficial ownership (who technically owns the property). If only legal ownership changes, and not beneficial ownership, there may not be a tax event.

    For example, an elderly parent might add their child’s name to their bank account or to the title to their home. They might do this based on the perception that it will simplify dealing with the assets as they age, or in an attempt to avoid probate tax. In these situations, a power of attorney or similar estate document (depending on the province or territory) may be better. The asset may not fall outside of the estate and avoid probate if beneficial ownership remains with the parent. There can also be risks to adding a child’s name to title, including creditor issues if the child is sued, family law disputes if the parents divorce, and elder abuse given the children can access the asset.

    Was there a deemed disposition?

    In your case, Flo, it sounds like your husband intended to partially dispose of the property. Did he document this specifically with a lawyer, or did he just add your daughter’s name to the rental property? Is she now receiving half the rental income?

    A true intention to transfer results in a deemed disposition of one-half of the property at the fair market value. It’s equal to selling part of the property, with tax payable when your husband files his tax return next year.

    Dealing with the increased capital gains inclusion rate

    It seems your husband added your daughter to the property title because of the increase in the capital gains inclusion rate on June 25, 2024.

    Beginning on that date, the inclusion rate for individuals rose from one-half to two-thirds for a capital gain of $250,000 or more in a single year. This means two-thirds of the capital gain is taxable instead of just one-half (as was the case prior to June 25). It’s only the capital gain in excess of $250,000 that is taxable at the higher rate. (For corporations and trusts, the inclusion rate is two-thirds for all capital gains.)

    You mention, Flo, that this was done for estate planning purposes. I assume you intend to hold the property for the rest of your lives. If that could be many years, it may not be advantageous to accelerate the payment of capital gains tax. Some of the capital gain will still likely be subject to the higher inclusion rate—no matter what—and paying tax earlier than you need to could be disadvantageous.

    I’m raising this not as a criticism, but because you may still be able to reconsider, if you haven’t specifically documented your intention and you simply added your daughter’s name to the property title. You should do some tax calculations with your accountant and discuss the documentation of the transfer with your lawyer.

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    Jason Heath, CFP

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  • How much is capital gains tax in Canada?—and other questions answered – MoneySense

    How much is capital gains tax in Canada?—and other questions answered – MoneySense

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    If you are going to sell next year, it is worth paying $833 of tax a year earlier? Think of it like debt. Imagine you can buy a refrigerator and you can pay $2,500 today or you can pay $3,333 in a year. Paying in a year costs you 33.33% more. That is a pretty high financing charge. 

    What about paying that $3,333 in five years? That would be like paying 5.9% interest. Not bad, right? But, because you are paying the so-called “interest” with after-tax dollars, I would say you want a lower interest rate than 5.9% to make it worth it. In other words, if your investments are only earning 5% to 6% per year pre-tax (less after tax), it may not be worth it to effectively pay 5.9% more annually. 

    For most investors earning a reasonable, mid-single-digit return, you might need to hold an asset for closer to 10 years to end up coming out ahead. 

    I am not suggesting you sell everything you expect to sell in the next 10 years before June 25. The budget proposals could be changed before enacted. A new government could change the rules again. You may have personal circumstances that make things different for you. 

    The point here is that if someone is very likely to sell an asset in the next few years that will be subject to the higher inclusion rate, there may be an advantage to doing so before June 25. And, that would generally apply to corporations. For individuals, only assets that would lead to more than $250,000 of tax in a single year.

    Ask MoneySense

    My wife and I own a cottage that will eventually be passed on to our children and at that point it will be a deemed disposition. My question is: Can the capital gain of, say, $600,000 be split up between both of us, each getting $250,000 at 50% and the remaining $100,000 at 67%?

    –Ian

    Can you split capital gains between spouses in Canada?

    When you die, you have a deemed disposition of assets. That would include a cottage. Although a cottage can qualify for the principal residence exemption, I will assume, Ian, you have a home where you live for which you would instead claim this exemption. 

    You can leave a cottage to your spouse and have it pass to them at its adjusted cost base without triggering tax. But you have the option of having the transfer value at any price between the cost base and the fair market value. If anyone other than your spouse inherits, there is capital gains tax payable. 

    This creates an interesting situation with these new changes. If a taxpayer dies and leaves a cottage to their spouse with a capital gain of more than $250,000, there may be situations where you want to declare a partial capital gain on the first death. If the surviving spouse is older, this may be more worth considering. If they are younger, it can be a tougher decision to make to prepay tax that could otherwise be paid many years in the future. 

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    Jason Heath, CFP

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