REAL ESTATE TAX PLANNING DO’S AND DON’TS

REAL ESTATE PLANNING
THE TAX PLANNING DO’S AND DONT’S

If you have a family cottage or vacation property, it’s especially important to do some planning because cottages can create big problems for families and be a key source of financial, emotional and taxation issues. This is particularly relevant as the price of real estate has risen 15% yearly for the past five years. Someone who inherited a cottage worth $100,000 and is now worth $500,000 would have a $400,000 capital gain. With one half going into your income the estimated tax bill is $100,000. How to pay for the tax bill is a common concern. Taxes owing can drain the estate of liquid assets and may leave the family with an asset that can be difficult to share.

Tax Planning Do’s

USE THE PRINCIPAL RESIDENCE EXEMPTION

A gift or sale of the cottage will be treated as a disposition at fair market value (FMV). It may be possible to use your principal residence exemption (PRE) to shelter a gain from tax, whether during your lifetime or upon death. The PRE can only be used to fully shelter one property from tax if you own more than one at the same time. Be sure to visit a tax professional to determine whether you’re able - and whether it makes sense - to use the PRE on the cottage.

CLAIM A CAPITAL GAINS RESERVE:

If you structure the notes properly, the tax on the “sale” can be paid over a five-year period rather than all in one year using what’s known as the “capital gains reserve.” If you simply make a gift and taxes are owing, you’ll have to pay that entire tax bill in the year of the gift.

Tax Planning Don’ts

SELLING TO THE KIDS FOR LESS THAN FAIR MARKET VALUE:

CRA will come back and charge taxes at FMV, while your children will have the reduced Adjusted Cost Base (ACB).

OWNING THE COTTAGE IN A CORPORATION:

The property won’t qualify for the principal-residence exemption if a corporation owns it. Second, you could receive a taxable shareholder benefit for using a corporate asset personally.

FAILING TO TRACK CAPITAL IMPROVEMENTS:

Tracking improvements should be done on both the cottage and the primary home. Keeping records today allows for the best use of the allotment of Principle Gains exemption.

Shayan Hamdani | Investment Advisor HollisWealth | a division of Scotia Capital Inc.
289-291-0825 Email: shayan.hamdani@holliswealth.com