This Blog was written by Natalie Melanson, Estate and Trust Advisor at MD Private Trust Company which is part of Scotia Wealth Management
This long Canadian winter has finally come to an end and Canadians can look forward to some great spring and summer long weekends and vacations. With the summer season upon us, the transfer of vacation properties to the next generation may come to mind, particularly with the aging baby boomer demographic. According to Statistics Canada’s 2021 Census1, 19% of the Canadian population is 65 years old and over. This segment of the population should be planning wealth transfer strategies, which can include a family vacation home as a second property.
The potential tax liability that can arise from the sale or deemed disposition on death of a vacation property can be a significant issue faced by those who plan to eventually transfer that property to heirs. Given the unreal surge in real estate prices in the last couple of years – including vacation properties – the accrued capital gains tax can be a considerable hurdle. This is where planning is crucial – to ensure that when the property transfers, whether while the owners are living or if deemed to have been disposed of at death, the means to cover the tax liability is considered.
Some people may believe that if they transfer or gift a vacation property to family (other than a spouse or common-law partner), for example, adult children, that they can avoid the tax liability. Unfortunately for them, a lack of planning and understanding can trigger an unrealized capital gain earlier than necessary, and generate a large tax liability that must be paid by the parents on their tax return in the year of transfer/gifting.
If the vacation property is to be gifted or transferred to an adult child or children to keep the property within the family, there are other potential issues to consider before transferring the property. Some of these issues include potentially subjecting the vacation property to a division of family property if your child’s marriage ends, potential exposure to a child’s creditors, and the parents’ loss of control of the property. These, plus the potential capital gains exposure, necessitates planning for the transfer of this asset. Seeking tax and legal advice is of utmost importance.
At death, the deemed disposition will trigger an unrealized capital gain. If the Principal Residence Exemption (PRE) has already been used on another property, it’s important to see there’s a way to decrease the potential capital gain on the vacation property before the owners’ death. If the vacation property has been in the family for decades, there is a good chance that updates and renovations have been completed through the years, which could help increase the adjusted cost base of the property and therefore decrease the capital gain. An accountant would be needed to review this. The entire estate’s assets should also be reviewed to see if the estate has enough liquidity to cover the estate’s total tax liability. If the wish of the testator is to have the family vacation property transferred to the next generation, they may consider obtaining life insurance to fund the anticipated tax liability. It’s always best to discuss specific circumstances with advisors to determine the best strategy for each goal.
There are many factors to take into consideration when transferring a vacation property from one generation to the next, but the sooner planning can start, the better prepared clients will be to ensure their wishes are carried out after death.
Check out Natalie’s previous post Vacation Property – Keeping it in the family