Written on June 24, 2013 – 7:00 am | by Steven Frye
My client has a family cottage, recently built and of significant value. Well, lets put it this way, she had to buy two sizeable lots side by side to complete the full building plan and it almost took two years to build.
We are in the process of assisting her with planning for her estate, which includes the cottage. She is not sure at this time whether her children, now young adults will want it (and/or will have the resources to maintain it) or it will be sold outright . In any event no matter how it is dealt with, there is good chance there will be a capital gain to deal with.
As a starting point, I told her she needs to document all the costs to complete the cottage so we a have a documented cost base to start with. She and her estate would have the proper support for the cost base going forward. I heard from her recently and the 1st thing she said “Mr., I did not realize what this exercise entailed, are you sure we need to do this? ” You bet you do! I said “And can you imagine if you didn’t do this now, what your estate would be faced with?” The Canada Revenue Agency has been known to audit dispositions of second residences like cottages, particularly if it involves a non-arm’s length sale or gift.
A key to good planning and minimizing the capital gain is to capture all eligible costs and maintain proper documentation (invoices, proofs of payment) for these costs.
If you bought the cottage, document the purchase price along with such costs as land transfer taxes, real estate commissions, inspections, legals, survey fees and title insurance etc.
If you had the cottage built like my client did, document all land acquisition costs including the items noted above, all costs of construction, landscaping, of new and renewed services to the cottage etc.
If you inherited the cottage or received it as gift, try to keep evidence of value at the time of the gift or inheritance.
If you had the property before 1971 and/or made an election in 1994 to take advantage of a capital gains exemption, check with your professionals to get the required documentation for the valuations performed.
What about improvements or renovations: I will talk about that in my next blog.
Thanks for reading