At the dawn of the holidays, perhaps you are feeling an excess of generosity and you want to spoil your children. Whether or not you want to put the keys to the family chalet under the tree, this is a question we are regularly asked: “I would like to give or sell the chalet at a favorable price to my children.” How can I do it without paying too much tax? “
I will disappoint you from the start. No, you cannot give your chalet away or sell it at a symbolic value lower than the market and expect to avoid a tax bill, on the contrary!
The Income Tax Act (ITA) contains precise rules on transfers of property between persons not at arm’s length, which includes related persons within the meaning of the income law (in particular, spouses, children, corporations linked).
Take the example of a cottage bought at a time when it was still possible to do so for $ 50,000. You’ve never done any major work, so the Adjusted Commodity (ACB) is $ 50,000. Suppose this one is now worth $ 400,000 in the market. Donating this cottage to your children would result in deemed proceeds of $ 400,000, and therefore a capital gain of $ 350,000, half of which must be included in the calculation of taxes payable. The cost of the property to your children will be $ 400,000, and they will only pay capital gain taxes on the increase in value beyond that amount on resale or transfer to the third generation.
Principal residence
If you have the idea of selling your chalet to your children at a nominal price, the tax impact of this strategy would be even more unfavorable. Indeed, if you sell it to them for the initial purchase price of $ 50,000, you would still have deemed proceeds of $ 400,000 with the same capital gain calculation for you. However, for your children, the cost of acquiring the chalet will always remain at $ 50,000. If they ever resell the chalet, there will be double taxation.
So now you know that giving is more advantageous than selling below the market price. However, you are still wondering how to lower the bill of over $ 45,000 for that very special gift.
First of all, you should know that the ACB is essentially the cost of acquiring the chalet, plus the cost of improvements made over the years. You may find it beneficial to dig through your archives to find invoices for work that may have been done, which you understand is no small feat if you have done multiple jobs over the decades.
In addition, although you have never lived in the chalet, you could decide to designate it as your main residence and thus benefit from the capital gains exemption that each taxpayer enjoys on this property. It is important to calculate for each year of ownership the capital gain of your residences and choose the one for which it is the most important. You can make this designation at the time of disposition by completing the required forms with your accountant.
Estate planning
What are the real goals behind this gift you want to give to the next generation? Is it really about giving it away immediately or continuing to share it with the family? If so, I will advise you to do more comprehensive estate planning.
Each family situation is unique, hence the advantage of a comprehensive strategic analysis of your legacy intentions during life and upon death. For some, the immediate bill of $ 50,000 (taxes and legal fees of the transfer) will have no impact on the achievement of their retirement financial goals, while for others, the fact of immediately disbursing this amount an RRSP, for example, would be far from ideal and represent a much higher long-term cost.
One thing is certain, for your children, it is obvious that finding a key in the Christmas stocking makes an exceptional gift, as much for the financial value as for the sentimental value of this gift. But don’t overlook the strategic thinking that should come with your heartbeat!
Warning: this column is not intended to establish formal recommendations or a legal, accounting or tax opinion. You are responsible for consulting the appropriate professionals for personalized advice.