Thinking of Passing on Your Cottage on to Your Kids? Well, There’s a Higher Tax for That as of June 25th 2024
New tax rules implemented in the 2024 Canadian Budget expand the capital gains inclusion rate for individuals to 66% on amounts over $250,000.
That’s alot to unpack, but here’s what it means:
When you sell a cottage for a profit (or any other non-principal residence) you have incurred a taxable capital gain.
Prior to this announcement, the capital gain inclusion rate was 50%, meaning you would simply take the gain you earned on the property and divide it in half.
This half would be taxed as income. Easy-peezy!
(Well, not really, there’s lots of nuance and details you need a professional accountant for, but this the basic framework.)
Example Under the Tax New Rules:
Here is how the new tax rules will affect cottagers:
Mary wants to gift, or will, her cottage (a secondary property) to her kids.
At current market prices, her cottage has appreciated by $500,000 since she bought it.
Under the old rules, at a 50% capital inclusion rate, $250,000 of this gain would subject to taxation as income.
Now, under the new rules:
- the first $250,000 would have a capital gains inclusion rate of 50%
- and the second $250,000 portion would have a capital gains inclusion rate of 66%.
The net result:
In Mary’s case, the blended average capital gains inclusion rate goes up to 58% under the new regime.
In other words, the estate or whoever is responsible for the taxes, will now have to include 58% of the gain as income on their taxes.
In this scenario, Mary’s kids, or the estate, could get a tax bill as high as 30% on the total gain — which is $153,000 on the $500,000 gain.
The Tax Rate Increases as the Gain Increases
Because of how blended averages work, the higher the gain, the higher the blended tax rate will be:
On a million dollar gain? The blended inclusion rate is 62%.
In this scenario, $620,000 of the gain would be treated as income, which could mean a tax bill as high as $328,000 when the property changes hands.
The other major problem is how do you pay this massive tax bill?
With interest rates on HELOC accounts in Canada hovering at 7%, low cost borrowing in Canada is non-existent — something you may need to think about.
Decision Time for Cottage Owners
Given that new tax rules apply on June 25th 2024, Cottage owners in Canada have only a couple of months to sort this new tax out, and decide what is the best course of action to take.
Are we going to see a flood of new cottages listings by owners looking to avoid this tax?
Time will tell.
Consult a Pro
There are lots of moving parts here, and you’ll need a pro for you individual situation.
There are definitions for principal residences, secondary properties to consider — also, lots of estate law and family trust rules that might apply. Its alot.
The takeaway here is that when it comes to cottages and secondary properties in Canada, capital gains taxes are going up June 25th 2024.
Are you prepared for this higher tax bill?
