Grandma’s Cottage — the perfect summer retreat for your client’s kids and grandkids — could end up becoming a liability when they eventually inherit it.
Jamie Golombek, managing director, tax and estate planning, with CIBC, says advisors should advise their clients to seek independent legal and tax advice to ensure that their clients’ most important asset — the family cottage — stays in the family and continues to be passed on from generation to generation with minimal tax implications.
Or else, the capital gains tax — which will inevitably accrue upon the sale or gift of a property or upon the client’s death — could potentially cripple the coffers of beneficiaries, forcing them to get rid of the property and, with it, the countless memories built over generations.
In his new tax estate planning report, Golombek discusses the unique tax considerations associated with recreational properties and tax-efficient ways to transfer the property between generations.
“It’s too late when someone dies. Advisors need to do some advanced planning and help clients with existing properties prepare for this tax liability,” Golombek says.
If your clients sell or gift their property during their lifetime, they’ll generally be taxed on the difference between the amount they receive (the proceeds of disposition) and the adjusted cost base (ACB), or tax cost of the property.
To trim down the capital gain, Golombek suggests keeping receipts for all improvements and renovations made to the property, as these expenditures can be added to the ACB of the property.
If, however, the property is gifted to a spouse or common-law partner, either during the client’s lifetime or upon death, it is deemed to automatically roll over (i.e., be transferred) to the other spouse or partner at its ACB and no gain will be immediately reportable.
In the case of younger clients planning to purchase their first cottage or vacation property — an attractive proposition, given the decline in real estate prices and historically low interest rates — Golombek says advisors can help them determine the best way that purchase can be affected, which could mean buying it outright or buying it inside a trust.
And if clients have extra cash in a corporation or in a business, Golombek says it isn’t a good idea to purchase a personal-use property — home or cottage — through their corporation because of the shareholder benefit rules.
“Under the Income Tax Act, the value of the rent-free use of the corporation’s residence by the shareholder is considered to be a taxable shareholder benefit and must be included in the owner’s personal income,” he says. “The other problem with a corporation holding the property is the inability to claim the principal residence exemption on the sale, gift or transfer of the property or the shares of the corporation.”
Click here for a copy of Golombek’s report.
(06/17/09)