Do you have a family member who owns a cottage?

Scott McEachern |

What is a capital gain?

As briefly mentioned in our video this week on our Facebook page and YouTube page, a capital gain occurs when a “capital property” asset that has increased in value is sold. Upon the sale, tax has to be paid, but capital gains are given favourable tax treatment. Only 50% of the gain is taxed at your marginal tax rate.

So for example, if you sell property for $300,000 that you paid $200,000 for, you’ve gained $100,000, but only $50,000 would be taxable. For a Canadian in a 35% tax bracket, there would be a tax bill of $17,500. The investor can keep the other $82,500 made from the gains.

cabin_0.jpgWho is responsible for the bill?

Typically the investor is responsible for the bill. If the investor has passed away, his estate will be responsible for the capital gains tax. When financial advisors mention estate planning, this is just one aspect of that overall plan.

Is there a way to get around it?

Unfortunately, not really. Luckily for all home owners, there is no capital gains tax on your primary residence. If you’ve had capital losses in the past, you can write off capital gains against that loss and can reduce the overall tax bill. Some people think that you can gift a property to a family member to get around this tax, but that simply isn’t true. The CRA views the “gift” as a deemed disposition, a virtual sale and tax still applies. Other solutions could involve the use of permanent life insurance, where the owner has decided to keep the property until his/her death but doesn’t wish to pass on the tax burden to future generations. In this case, the life insurance is used to pay for any capital gains.

To discuss specific or more sophisticated situations such as an estate freeze where the capital gain may be limited, contact us now and we can discuss your case and potentially refer you to qualified professionals in our network.