Vacation homes are a memory making asset that induce sentimentality in everyone – parents, children and grandchildren alike. They are a home away from home where your entire family can get together, enjoy each other’s company and celebrate important family events.
But, like any other asset, vacation homes can be a substantial tax liability if they are not planned for properly, especially when you consider the appreciation often associated with a vacation homes.
So how do you plan around a cottage?
You take advantage of all the tools available to you and, in Canada, there are many unique tools.
The first of which is declaring a principal residence.
We're all entitled to a primary home and we can elect, in our estate, which home is to be considered the principal residence, when we pass on.
The benefit of claiming a principal residence is that you do not have to report the sale of the residence on your income tax return, when it transfers to your estate. In turn, you will not have to pay tax on any gains that were incurred.
To demonstrate, let's say your house in Calgary was worth $750,000 and your cottage is worth $2 million, when you bought them.
Now assume that the cottage’s value increased by $1 million but the house only increased by $250,00. We wouldn’t want the primary home to be the Calgary house because the total gain is only $250,000. Instead, we would declare the cottage as the principal residence and take a tax exemption on the $1 million gain when it is transferred to the estate.
This is a basic example that does not consider all factors, but it demonstrates the basics. Other factors that need to be considered are additional expenses incurred to improve the home. As such, it is important that families keep record of all their receipts for both their home and their cottage. That is because these expenses will be added to the adjusted cost base, which is the value the Canada Revenue Agency will not tax, even if the home is not declared the principal residence.
The best part about this is you don't have to decide today. You can make that election when you need to, providing you with a privilege and opportunity that few people are aware of.
To find out about other tools that can be used to minimize the liabilities associated with owning and transferring a vacation home, contact us today for a complimentary consultation.
