The cottage holds a special place in the heart of Quebecers. An ideal place for family gatherings, it’s only natural that you want to leave it to your children to carry on the tradition. Yes, but at what cost?
Even if you want to preserve the cottage and pass it on to future generations, it is necessary to anticipate the tax consequences of the sale or transfer so that you are not surprised.
You should be aware that a significant tax may apply at the time of transfer. “The tax authorities actually believe that the cottage is being sold at market value. The difference between that value and the price paid to acquire it, minus the cost of renovations and work done over time, is the taxable capital gain,” explains Kevin Quach, vice president. Succession Advisory, TD Wealth Management. The account can be particularly significant in this period of rising prices in the real estate sector.
Be careful, warns Kevin Quach, because the tax applies even if it is a transfer, i.e. a gift, between related persons, for example from a parent to their child.
Who will pay the tax? The person who donated the cottage because he is deemed to have made a capital gain even though he gave the property to his child.
If the cottage is bequeathed to a relative by will, it is the estate that will have to pay the tax. The rules for determining the capital gain are the same as the rules applicable to the transfer.
Exception to know
However, it is possible to use exemptions for the main residence. This means that no tax is payable for the period that the cottage served as your main residence. This exemption may be partial, in other words only valid for certain years. Of course, you cannot claim this exemption twice for two different residences in the same period.
Pay your tax now
Kevin Quach points out that due to rising property values, the sooner the cottage is converted, the less likely the capital gain will increase. “By transferring and paying the tax now, it is possible to ‘freeze’ the value of the cottage,” he says.
If you want to leave the cottage to your heirs after your death, the financial and tax implications can be better managed by taking out life insurance. The amount paid by the insurer on death will cover the costs associated with transferring the cottage to your heirs. However, this requires good property planning in advance.
Exception for husband
An exception applies when you transfer the cottage to your spouse in a will or during your lifetime. “The tax bill will then be deferred until the death of the spouse who received the cottage,” reports Kevin Quach. In this case, it will depend on the property to pay the tax.
- Are you planning to bypass the law and sell the cottage to your child for a token amount or well below market value? Know that the tax authorities are not stupid! “Selling below market value can result in double taxation,” warns Kevin Quach.
- For example, if the value is $250,000 and you sell for $150,000, the tax will still apply on the $250,000. Your child will also pay the price, because when the cottage is transferred, his taxable profit will be higher, because the price he paid then did not correspond to reality. This is why it is best to have a reasonable price when selling to a related person. A certified appraiser can help you determine it.
- Don’t forget to keep invoices for all the work and renovations you’ve done to your cottage. This will reduce the capital gain that will be taxed to you when the property is transferred.