Keeping your cottage in the family
Do you have fond memories of family summer vacations at the cottage spent swimming in the lake, building sand castles on the beach, or fishing on the dock? Do you envision your children and grand-children making similar memories there for years to come, even after you’re gone?
If your wish is to pass on your recreational property to your children (or someone other than your spouse), keep in mind there are tax implications. Half of the capital gains on a cottage or vacation property are included in your income. Depending on the province you live in, the taxable portion could be taxed at up to 50 per cent. You might not be in the highest tax bracket, but the impact can still be significant.
You can’t avoid capital gains tax by selling your home and making your cottage your primary residence. And selling the cottage to your children for a token amount of $1 won’t help either. But there are things you can do to help minimize taxes on your estate.
Here’s one way. Let’s say there’s $50,000 of tax owing from the capital gain on your cottage when your children inherit it. If you had purchased a $50,000 last-to-die life insurance policy with your spouse, your children would get a $50,000 tax-free death benefit after both of you pass away. That money could be used to cover the tax on the capital gain.