Tax Planning for Cottage Owners
This post will list some best practices for Canadian cottage owners.
Capital Gains Tax on Your Cottage
If your cottage is held in your personal name (or with your spouse), when you sell it, the sale will likely trigger capital gains.
When you die, you are deemed to have disposed of all your property. This means when you die, the capital gains tax will be triggered on your cottage (unless held JTWROS).
The capital gains tax you’ll owe from the sale of your property is the difference between the sale price (or “fair market value” when you die) and the “adjusted cost base” (ACB).
Adjusted Cost Base
The adjusted cost base of your cottage is the purchase price plus all capital expenses. To determine what is considered a capital expense and what is considered a current expense, follow the CRA’s definitions:
- A capital expense generally gives a lasting benefit or advantage. For example, the cost of putting vinyl siding on the exterior walls of a wooden property is a capital expense.
- A current expense is one that generally reoccurs after a short period. For example, the cost of painting the exterior of a wooden property is a current expense.
Documentation for Your Cottage
Keeping good records of your cottage expenses is important. Whenever you spend money to make repairs or improvements, document all transactions. This can mean scanning receipts and saving those receipts to a folder labelled “Cottage” on your shared drive. Designating whether the expense is a current or capital expense helps.
Many cottagers think paying for expenses in cash to local contractors “under the table” is a good idea, but it’s not. You should document any capital expenses properly because they add to the ACB of your cottage and reduce the capital gains tax you’ll owe in the future.
Even better, keep a running tally of the ACB by logging cottage transactions into an accounting software like Quickbooks or Xero. This way, you’ll be able to incorporate the current ACB as you review your estate plans on an annual basis.
Round up purchase agreements, documents showing your title, etc. Scan these documents into the “Cottage” shared drive folder so they are easily accessible.
If you don’t keep good records for your cottage, it makes the job of your executor more difficult.
How Can an Advisor Help?
Consult with your lawyer and accountant to consider ways to structure the sale of your cottage to family members in the most tax advantaged way. You may be able to structure the sale so that capital gains tax is spread out over several years, thereby lessening the burden on your heirs. You might also consider putting your cottage inside a legal structure that makes it easier for future generations to make tax plans or assist with governance (like a trust or corporation).
More Resources
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