Français
Welcome Page
Properties for sale
Regional History
Laurentian Place Names
What's It Worth
Associations
E-mail us

E

ver since the law pertaining to capital gains changed last February we have been receiving a lot of calls from people who want to keep their country property, but recognize that steps have to be taken to keep it away from the taxman.

In the good old days, there was no capital gains tax.

In 1971 the government brought it in and declared that December 31st 1971 would be 'Valuation Day', and that any value that your property gained over what it was worth on that day would have to be reported on your income tax return in the year that the gain was realized (i.e. the date of transfer or sale of the property). A provision was made that every taxpayer had the right to one primary residence which would be capital gains free, and therefore a couple could designate the country property as the primary residence of the spouse.

In 1981 that was changed limiting each married couple to only one capital gains-free residence. Effective 1985, each taxpayer had the right to a $100,000 lifetime capital gains exemption on any gains realised from all other sources. That is to say that the first $100,000 of capital gain would be exempt from the tax. Also, only 50% of the gain needed to be considered for the tax. That is, if you had an $80,000 gain, $40,000 of it would be taxable.

In February 1992, the status of the exemption was changed so that the exemption could not be used against any gain realized on real estate after that date. By this time, 75% of the gain, rather than 50% was taxable as income in the year of sale. To go back to the example mentioned above, that meant that if at sale of your cottage you realised a gain of $80,000, 75% or $60,000 was taxable as income in the year of the sale. But because the lifetime exemption no longer applies to real estate after February 1992, any gains calculation has to take into account the proportion of the gain made prior to February 1992, and the proportion made since.

These proportions are calculated simply on the basis of the time elapsed before and since February 1992 and no argument will be accepted that the gain was all realised before that time and that the property has lost value since. In sum, this means that the longer you wait before triggering a capital gain, the more of the gain will be unprotected by the capital gains lifetime exemption.

It is also important to note that any transmission of property whether by gift or by death, except in the case of to a spouse, triggers a deemed capital gain in the account of the giver or the deceased in the year of the transmission. Many people, myself included, thought that the gifting of property was a way of postponing the calculation of the capital gain, but it isn't.

This deemed capital gain means that if you intend to give or will your property to your children, you will trigger a capital gain in the tax year in which it is transmitted and some taxes will have to be paid, even if the intention is just to keep the property in the family.

As a result of the various facts listed above, many of our readers have been exploring means of triggering that capital gain now while the $100,000 exemption still has some effect. Many have also expressed the concern that a future government may suspend the $100,000 lifetime exemption altogether, before they have even had a chance to use it.

If you are concerned about how this might apply to you, it might be a good idea to take some time and brainstorm with your accountant this winter.

Royal Trust offers a good detailed explanation of the different options open to cottage owners. It is called "The Cottage" and can be obtained by contacting Royal Trust Image Services, Attention - Cottage Succession Booklet, 115 Thorncliffe Park Drive, Toronto, M4H 1M1.

The above was prepared in consultation with Goodwin Neuhaus Stein, Chartered Accountants and is of a general nature, not intended to cover all aspects of the subject matter. Before implementing any planning based on the above article, the specific facts pertaining to your case should be carefully considered with the help of a professional.

Return to What's it Worth index