This blog post was written by: Derek Hambly, Estate and Trust Consultant, Scotiatrust London

In part one of this post, posted on June 5^th we discussed that if your cottage is not also a qualified farm or fishing property, avoiding capital gains entirely can only really be done by declaring it as your principal residence. However, in the circumstance where the cottage is not the best option to declare as your principal residence, and you’ve done all the capital improvements that you are prepared to do, then it is time to face the decision regarding the timing and method of triggering the capital gain on the cottage. In that regard you are faced with a couple of questions: trigger the gain now or defer it to your passing? and spread the gain across multiple tax payers or have the gain handled by your estate?

As the sole owner or joint owner with your spouse you can pass your cottage through your estate and have your estate pay include the capital gain of the cottage on your Final Return. This defers the triggering of the gain until your passing. If you are concerned that your estate may not have sufficient liquid funds to pay that capital gain and that the cottage would need to be sold to cover the tax liability permanent life insurance or last-to-die life insurance are excellent strategies to ensure there is sufficient and ready cash on hand to be used by your estate to pay the final income tax liability.

Another option is to trigger the capital gain during your lifetime in an advantageous year such as a low-income year due to retirement or disappointing investment returns or a capital loss. An advantageous year to trigger the capital gain is one in which you have ready cash on hand as the result of the sale of another property, cashing in investments, or through an inheritance. In these circumstances, and if you intend to leave your cottage to beneficiaries such as your children, then you have the ability to settle a family trust (inter vivos trust) which triggers the capital gain at the time the cottage is put in the trust and your death does not trigger another realized capital gain. This strategy allows you to realize the gain at a convenient time, avoid paying probate on the value of the cottage and creates certainty of intention with respect to your testamentary plan for the cottage.

Additionally, if capital gains are accruing and an advantageous year arises when it would be possible to realize the capital gain there is the possibility to keep the cottage in the family but get it off your books. In the event that you wish to gift or sell the cottage to your children or other beneficiaries you can trigger the capital gain by selling the property to them. It is important to note that whatever arrangement you decide with your children to transfer the property, it is prudent to do so at fair market value to avoid double taxation down the road, rather than selling or transferring the cottage at a discount. Instead of selling at a discount consider a strategy such as selling the cottage to your children in exchange for a promissory note for some or all of the sale price and forgive that promissory note in your Will or establish a fair re-payment plan.

All this to say, there are strategies available, many of which were not discussed in this series of posts to suggest to clients or explore for yourself. The worst strategy is to leave the planning until it’s too late, or too expensive. Food for thought for your drive to the cottage.