Tax time is around the corner. In honour of that, I thought I would write about something tax-related.
In Canada, when you sell real estate, you have to pay capital gains tax on a portion of the money you earned on it; the only exemption is for your principal residence. If you own a cottage, and also own a home in town that is designated as your principal residence, you will pay capital gains tax when you sell the cottage.
Sometimes, people think that they can avoid paying capital gains tax by selling the cottage to their children for $1. After all, they’ll be leaving it to the kids in their will; why not sell it now, have it in their names so there’s no probate tax, and sell it for a dollar so there’s no capital gains tax because there was no gain? The problem: CRA will assign the sale fair market value for tax purposes. Even if you only got $1, they’ll treat it as if you got whatever the going rate would have been, and you’ll still owe the capital gains tax. (Also note, this also applies if you add them jointly on title with you; you’ll pay the equivalent of whatever percentage you give them.)
The bottom line is that, before making any decision like this, have a good long talk with your accountant and lawyer to ensure that you will achieve the objective you are trying for.