Secondary homes are subject to capital gains tax – how will your inheritance be affected?

Secondary homes are subject to capital gains tax In Canada, secondary residences are considered taxable assets, meaning owners will be taxed for any increases in the property’s value when the property eventually changes hands, including when it is inherited. This can be a tricky issue for real estate lawyers and their clients, and was the subject of a recent Globe and Mail article by columnist Guy Dixon. Dixon presents a theoretical scenario wherein a wealthy couple wants to leave their $800,000 vacation home in Muskoka, which they purchased for $200,000, to their son. The capital gains tax would be approximately $200,000 – if the son were unable to afford that cost, the tax burden would fall automatically to the couple’s estate, which would affect the inheritance of other offspring.
“We see it now particularly because there has been such an escalation of property values,” said Suzana Popovic-Montag, a Toronto estates and trusts lawyer, in Dixon article. “Many people, more than in the past, have a second property or vacation property, and it amounts to a substantial portion of their estate.”
With children increasingly earning less than their parents, real estate lawyers may be dealing with this problem more and more often. So, are there solutions?
Some secondary home-owners are choosing to gift or sell the properties to their children at a reduced price before they pass away. In doing so, the property owners retain responsibility for the existing capital gains tax, while the child would be responsible for future capital gains.
Others may ask their real estate lawyers to add their heir’s name to the property title using a bare trust.
“The vast majority of Canadians who add kids onto the cottage, whether they realize it or not, are doing it in this bare trust capacity, because very few are then filing on their tax returns that they gifted [it],” Jessica Lyle, a Nova Scotia estate and trust lawyer, explained to Dixon. “The bare trust idea then means that on death, the kids know that they have to deal with the cottage in accordance with the will.”
A final option would be to make the vacation home or cottage the parents’ primary residence, but this solution requires foresight: the available primary residence exemption, which we discussed in December, is only available for the amount of time a household is considered a primary residence.
Because of the complex nature of trust, estate, and real estate laws, each of these scenarios will require the assistance of an experienced attorney. If you are considered bequeathing a secondary residence to a member of your family, contact the real estate lawyers at Nanda & Associate today to learn how we can help.

Fill In the form below, We will get in touch with you as soon as possible.

Demo Description