Opening the family cottage and scheduling work weekends at hunt camps are anticipated spring activities. What wasn’t anticipated by many this spring, was an increase to the capital gains inclusion rate.
In the 2024 federal budget, the government proposed increasing the capital gains inclusion rate for individuals to 66.67% on realized gains above $250,000. Capital gains realized below the $250,000 threshold will be taxed at the current inclusion rate of 50%. Corporations and trusts will be taxed at 66.67% without benefit of the threshold. These proposed changes are scheduled to take effect on June 25, 2024.
What it means
Here’s a simplified example. You sell your cottage or hunt camp for $750,000 for which you paid $250,000.
If you do so before June 25, 2024, the capital gain is $500,000 ($750,000-$250,000) of which 50% is taxable at assumed 50% Marginal Tax Rate (MTR). This means:
- (Capital gain x 50% Inclusion Rate) x 50% MTR
- ($500,000 x .50) x .50 = $125,000.00 taxes owing
If you sell after June 25, 2024, the capital gain is $500,000 of which 50% of first $250,000 is taxable and 66.67% of balance is taxable at assumed 50% MTR. This means:
- (Capital Gain of first $250,000 x 50% Inclusion Rate) + (Capital Gain of balance x 66.67% Inclusion Rate) x 50% MTR
- ($250,000 x .50) + ($250,000 x .6667) x .50 = $145,837.50 taxes owing
In the case of joint ownership, the expectation for a married couple is that gains would equal $500,000 before subjected to the 66.67% inclusion rate.
Some hunt camps have multiple owners. In such a case, each respective owner will have their own $250,000 thresholds.
A lifestyle asset
For many cottagers and hunt camp owners, these properties were never really considered an investment, but a lifestyle asset to be enjoyed and passed down to the next generation. One critical piece not addressed in the budget is the death of the property owner. CRA treats the death of an owner as deemed to have sold their assets immediately prior to death at fair market value (FMV). When it comes to a married couple who jointly own a recreational property and one dies before the other, it’s not certain how CRA will account for the deceased’s threshold value on a property that is exempt from immediate taxation due to spousal rollover provisions. The CRA might account for it with some kind of notional credit, but most likely the reduced inclusion rate on the first spouse’s death would be lost.
How to handle it
Below are various ways one can minimize and/or offset capital gains tax.
- Invest in your property: documented capital improvements (proof with receipts) will increase your adjusted cost base, in turn potentially reducing your capital gain when your property is sold or upon death.
- Use your principal residence exemption: if your cottage has gained more in value that your family home, it may make financial sense to claim it as your personal residence. You may not avoid capital gains, but you may have the ability to shift them.
- Make children co-owners before June 25th: transfer a percentage of the property ownership to the kids, thereby paying reduced taxes on FMV of transferred percentage and defer use of $250,000 threshold on balances to a later date. However, the percentage change in legal control may pose challenges.
- Gift it to your kids before June 25th: Pay the reduced tax rate now on FMV and crystalize 100% of current inclusion rate. However, full change in legal control will be a challenge for most families.
- Transfer ownership to a trust before June 25th: Pay the reduced tax on FMV by gifting ownership to your kids as beneficiaries of an inter vivos trust, all without losing control. However, trust is subject to deemed disposition of property every 21 years with tax due on accrued gains at then FMV.
- Buy a capital gains exemption: purchase a properly structured life insurance policy at a discounted rate relative to tax liability projected at death.
Taxes are taxes
Family dynamics are never the same as each situation is unique, but taxes are taxes regardless of inclusion rate. Professional planning and execution are recommended. Find the best solution for your situation by working in collaboration with your chartered professional accountant, lawyer, and financial planner.
Scott A Morrow CEA, CLU is owner and head guide at Outfitter Financial. He’s an accredited financial planner with 30 years of experience. His office is in the field and on the water… fishing and hunting with his clients weekly. Reach Scott at: scott@outfitterfinancial.ca
Leave A Comment