"My kids love this chalet. One day it will be theirs... "
Are you sure?
If it is your intention that your children will one day own the family chalet, beware. It may cost many times what you originally paid for the property to transfer it into their hands years from now. (For the purpose of this article "chalet" refers to a cottage, condominium, vacation/2nd house or undeveloped lot.)
Capital gains rules:
- If your chalet has not been specified as a principle residence, it is subject to the same capital gains as any other growth asset.
- A taxable disposition occurs at death or when the property is given away as a gift.
- 50% of the growth since 1971 must be taken into income in the year the property is disposed of.
- Taxes on capital gains may be paid over a 10-year period after death, but interest charges will apply and security for the amount owing must be provided.
- Any gain on a chalet triggered by the 1994 lifetime capital gains election will be added to the cost of the property.
- With proper planning the taxation of capital gains may be postponed until the latter of the deaths of the two spouses.
How does it work?
Value of 30 years growth - $861,000
Initial price of the chalet - $150,000
Cost of additions - $ 50,000
Adjusted cost base: - $200,000
CAPITAL GAIN: - $861,000
Taxable capital gain at 50%: - $330,500
Income tax payable at 50%: - $165,250
Can you afford the gift? Can your estate afford the bequest? Or must the chalet be sold to pay the tax? Possible solutions:
- You, your estate or your children could pay your income tax liabilities from current funds. (Would liquid funds be available? What would you or your children have to give up to pay the tax?)
- Money could be borrowed to pay the tax. (Would credit be readily available? Would the borrowers have adequate cash flow to repay the loan with interest? What interest rates would be in effect at the time?)
- The tax could be paid in installments after your death. Would the estate of your children be able to provide the necessary security to Revenue Canada? Would the estate of your heirs have adequate cash flow to repay the amount owing with interest?
- Appropriately designed life insurance could be put in place to pay the tax. (Income tax liabilities arise on the death of an individual. Life insurance creates tax-free cash on that event to provide a solution.
- Through careful planning between you and your spouse, the payment of income taxes can be postponed until after the second person's death. This usually makes it a very economical way to pay funds when the second death occurs.
- Sit down and plan with a professional. Look at your present situation and figure out the desired situation you would like to have for your estate.
Once you have done this it would becomes much easier to figure out the solution that will fit your needs. By planning now, your children and grandchildren will continue to enjoy that chalet that you all love so much.
Trying to decide on where to purchse a recreational property? CLICK HERE to view the RE/MAX Recreational Property Report 2013. Lots of information on the most beautiful areas in Canada to purchase a cabin, chalet, or any other type of investment property or second home.