In today’s post Mark Goodfield, a professional accountant and the writer behind the excellent Blunt Bean Blog, continues the series on estate planning issues surrounding the family cottage. Click here for Part 1 of the series.

In my first blog in this three part series on transferring the family cottage, I discussed the fact you can only designate one property as a principal residence per family after 1981. In order to explore the income tax implications associated with transferring ownership of a cottage, I will assume both a city residence and a cottage have been purchased subsequent to 1981 and I will assume that the principal residence exemption has been fully allocated to your city home and the cottage will be the taxable property.

Many parents want to transfer their cottage to their children while they are alive, however, any gift or sale to their children will result in a deemed capital gain equal to the fair market value (“FMV”) of the cottage less the original cost of the cottage, plus any renovations to the cottage. Consequently, a transfer while the owner-parent(s) is/ are alive will create an income tax liability where there is an unrealized capital gain.

Alternatively, where a cottage is not transferred during one of the parent’s lifetime and the cottage is left to the surviving spouse or common-law partner; there are no income tax issues until the death of the surviving spouse/partner. However, upon the death of the surviving spouse/partner, there will be a deemed capital gain, calculated exactly as noted above. This deemed capital gain must be reported on the terminal (final) tax return of the deceased spouse/partner.

Whether a gift or transfer of the cottage is made during your lifetime, or the property transfers to your children through your will, you will have the same income tax issue, a deemed disposition with a capital gain equal to the FMV of the cottage less its cost.

It is my understanding that all provinces with the exception of Alberta, Saskatchewan and parts of rural Nova Scotia have land transfer taxes that would be applicable on any type of cottage transfer. You should confirm whether land transfer tax is applicable in your province with your real estate lawyer

So, are there any strategies to mitigate or alleviate the income tax issue noted above? In my opinion, other than buying life insurance to cover the income tax liability, most strategies are essentially ineffectual income tax wise as they only defer or partially mitigate the income tax issue. In my final blog installment of this series, I will summarize the income tax planning options available to transfer the family cottage.

This article has 24 comments

  1. Pingback: Transferring the Family Cottage: There is No Panacea | Canadian Capitalist

  2. I think that there is no land transfer tax in Quebec if transferring from a parent to a child.

    Also, one way to significantly delay the capital gains tax is to put the property in the child’s name when you first buy it (if they are over 18). Since most couples only have one kid these days, it shouldn’t be too hard to choose.

  3. Firstly, CC, thank you for posting my guest blogs.

    Anon- There is a concept of “natural love and affection” in most provincial land transfer tax legislation. It was not clear to me as a non-lawyer if thses exemptions will apply in respect of cottage transfers to children; that is why I note to speak to your real estate lawyer about the matter.

    The theme of the blog(s) is transferring the cottage once it is already in your parents name; so I have not discussed how to purchase a cottage. Your suggestion to have the cottage purchased in your child’s name is valid. However, I would suggest that most parents would be loathe to place such a valuable asset in a child’s name, especially in their late teens, before their life decisions and life direction becomes apparent. In addition, once the child purchased their own home, they would then be able to only designate one of the properties as their PR. If undertaken, your suggestion would defer the income tax on the cottage one generation.

  4. Question for Blunt Bean Counter on a related topic. My mother is 68 &
    is buying some commercial real estate. When it is eventually passed on, do you only
    have to pay capital gains taxes if the property is sold. Is there any benefit to having the asset
    in a corporation as opposed to personal name?

  5. Hi Victor,

    I am slightly brain dead from reviewing multiple personal income tax returns, but I will give it a shot. As I do not know all the relevant facts, I will provide some generalities. I cannot tell from your question if your mother is single or a widow or married. Assuming she is not married (since if married the property can pass to her spouse tax free), when she passes away, she will be a deemed to have disposed of the real estate on the date of her passing at the fair market value (“FMV”) of the real estate on that day. If the FMV is greater than the adjusted cost base on the date of her passing, there will be a capital gain on her final (terminal income tax return). Thus, it is not a sale that triggers the gain, but her death. This can be problematic if much of her net worth is tied up in the real estate and the estate does not have the money to pay the income tax liability if there is a capital gain.

    If the real estate is in a corporation, on her passing, the shares she owns of the corporation would be deemed to be disposed of at their FMV, so you have the same issue. Typically the main benefit of holding the property in a corporation is limited liability, as the income tax advantages of investment corporations have been diminished over the years.

  6. BBC

    I’m in a similar situation a described above – my elderly parent is divorced we are trying to do some estate and tax planning.
    1) In terms of the scenario above what is the main advantage of holding any property in a limited corporation. If for instance the corp. can’t pay the due taxes on the capital gain are the directors of the company personally liable ?

    2) Related to the above question at what point should we consider setting up a a trust for the properties(s) due to the expenses involved ?

    Thanks
    Vivek

  7. Hi Vivek

    Corporate ownership for commercial properties does not provide much advantage orther than creditor proofing in most cases. The corporate tax rate on passive income earned by such a corporation is approximately 47%, so government policy is to not provide an income tax advantage in using a rental or passive corporation. I am not an estate lawyer, but my understanding is the executors would be liable, not the corporate directors.

    Not to avoid your 2nd question, but there are far to many factors to be weighed, so I cant provide an answer. You probably need to engage professional help to provide you guidance.

  8. Thanks BBC….you really know your stuff!
    I know the interest is deductible on borrowed money if your buying investment property. But what if that rental income is being paid out as a ‘management fee’ ….does it make any difference if your allowed to deduct it?

  9. Hi Victor

    Thx. Interest deductibility in general is linked to the use of the funds, thus the deductibility on an investment property since it is used to earn rental income. By management fee, I assume you dont mean a fee to someone arms length who actually manages the property; which would just be an expense and would not affect the interest deductibility. My guess is you are paying or contemplating paying a management fee to you or your mother.

    First of all I have a problem in general with management fees, our firm tries to avoid them like the plague since you get into what is reasonable with the CRA and why are you even paying an owner a fee? Anyways, I have not really looked at this issue and cannot provide a definitive answer. My guess would be yes, since the loan was used to buy a property to generate rental income and the fee is just a way to pay out that income, albeit a way I would not recommend.

  10. Pingback: Ways to Reduce the Tax Hit from the Family Cottage | Canadian Capitalist

  11. I own property in BC and would like to include my wife as a joint tenant. I believe we are exempt from the property transfer tax, but will there be a capital gain tax for my wife?

  12. If say, someone transfers a property to their spouse, it is free from captial gains. As such, the Fair Market Value is used and thus increases the adjusted cost base of the property. If then, shortly after, that person transfers the property to a child over 18, is the capital gain that the spouse must claim become minimized because the FMV on reciept and the FMV on transfer do not differ too much?

  13. Does the transfer of a parcel of land (that at one time had a cottage on it) work the same way?
    It sounds like the transfer is exempt from duties.
    Being transferred from father to son.

  14. I am interested in hearing your answer to Greg’s question as the answer may impact my situation as well. Thx.

  15. How do you establish FMV? Can the MPAC assessment be used?

  16. I have been told that if i transfer my cottage to my children that I will be subject to Capital Gains, which I understand and that I would lose my Old Age Pension. What does my pension have to do with a transfer of cottage? Thanks. Arch

  17. Dear Blunt Bean Blog – in 1995, a good friend’s parents signed a “Transfer/Deed of Land” for the family cottage to include my friend. This was done at the time as she was the only one (of six siblings) interested in maintaining and using the cottage. Upon the signing of the deed, the cottage was evaluated and capital gains were paid n full by the parents. In 2012, one parent passed on. Subsequently the other has decided to ask my friend to rescind the original deed and to sign documents to that effect. My concern is that this could be financial suicide for my friend and her husband. Having asked my accountant on her behalf, he noted that perhaps this again would trigger capital gains, as the deed would have to be transferred back again to the sole parent. My friend and her husband certainly do not have that amount of money available should this be the case. Could you confirm if this is the case?

  18. my mom transferred the cottage to me just before she died. i would like to live there soon. can i leave my pr to my 2 daughters to live in and live at the cottage as my pr? do i have to pay anything to anyone?

  19. Living in Quebec. My father passed away with principal residence as part of the estate. When passed on and PR is free from capital gains, does it mean that the proceeds of the sale of the property are to be included in each of our individual tax returns for that year as income?

  20. If we remove any of the persons on a deed, currently their are 9 ( cousins) on the deed. Are we subject to Capital Gains Taxes.

  21. Hi:

    Can you please advice me on the possible options to my parents wish.
    My parents own a single family home which they rent in Ontario. They have two sons, no other kids. I am one of them. They would like to give this property to us. My brother is interested in the home, which he will live in as his PR. He may want to rent it, not sure? We are obtaining a fair market value on the property. Let’s say it is worth 500K, don’t know yet. My brother would own the home and give me half the value of the house. He will need to obtain a loan for 250K. Then will transfer the amount to my personal bank account.
    Questions: Is this possible? What are the tax implications on all of us? My parents, my brother and I. If I do receive the 250K is it taxable income? If I put the money 250K into an investment property, can the tax be less.

    I would appreciate any help on this.

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