Part of your family heritage

Now that it's spring, weekends at the family cottage are back on the agenda.  This secondary residence offers you and your family undeniable advantages.

Your cottage is a valuable part of your family heritage.  In many cases, this secondary residence was purchased for a song many years ago. The increase in market value resulting from the boom in the Canadian real-estate market over the past few years will likely result in a significant capital gain when it is sold, or when your estate is settled. And this capital gain is taxable! Here are some ways to help your family hold on to that precious asset!

Principal-Residence Exemption

By and large, the sale of a principal residence does not result in a capital gain.  If your cottage is now worth more than your house, you can designate it as your principal residence, even if you occupy it for only a few days a year.  Obviously, you cannot own more than one principal residence at a time!

Canadian Tax Backgrounder

If either of the following statements applies to your situation, the capital gain on your cottage could be reduced.
 

• Before 1972, capital gains did not exist in Canada.
• Between 1972 and 1981, both members of a couple had the right to designate a property as a principal residence.
• In 1994, taxpayers were given one last chance to take advantage of the capital-gains deduction of $100,000.
   

Setting Enough Aside

Your estate could pay taxes on the capital gain on your cottage by using your savings.  If you do not have enough put aside at present, you will have to reduce your expenses and save more.  This option, obviously, would not be realistic in the event of your unexpected death or a major market downturn affecting your portfolio.

Transferring Ownership to Your Children Now

You may transfer ownership of your cottage via a donation or sale to your children. This transaction enables you to "freeze" your capital gain based on your cottage's present value, leaving your children responsible for any subsequent gains.  Regardless of the method you choose, however, proceeds from this deemed disposition will always be the property's fair market value, and you will have to pay taxes on the resulting capital gain. The table below gives you a good example.

This example assumes that 50% of the capital gain is taxable at the maximum marginal rate of 42%.

If you opt for a donation to your children, you will have to pay taxes on the capital gain from your savings.  If you choose to sell, you could use the income from the sale to pay those taxes.  Of course, nothing prevents you from giving your children money to help pay the mortgage they will have to take out on the cottage.  You could also spread the capital gain out over several years if you grant this mortgage directly to your children.

It is not recommended to sell your cottage at a price lower than its fair market value, as this may result in duplicate taxation-i.e., both you and your children could be taxed.

Purchasing Life Insurance

An effective way of covering the tax on capital gains is to purchase permanent life insurance.  The death benefit payable under this coverage is non-taxable, and your estate can use it to pay the capital-gains tax.  In order to reduce the risk of being turned down for life insurance because of health problems, consider taking it out as soon as possible.

It's never too late to make the right decision.  Take advantage of the time you spend opening up the cottage this spring to reconcile your wishes about your secondary residence with other aspects of your financial plan.  This is also an excellent way to avoid conflicts between your heirs.

To learn more, contact our Desjardins Financial Security Independent Network representatives or our Desjardins caisse financial security representatives.