Dale Jackson

Personal Finance Columnist, Payback Time

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For many Canadian families closing the cottage for the season is a Thanksgiving weekend tradition.

With fall in the air it’s also a sobering reminder of the passage of time, and an opportunity to focus on the future. That future could involve passing the cottage along to the next generation.

But transferring ownership of a second property can be costly, especially with the rapid rise in residential real estate prices. Technically, the property is sold and that generally triggers a tax on half of any gains in the property’s value. In other words, the difference between the original purchase price and the appraised value is divided by two, and that amount is taxed according to the rate of the new owner.      

Here are a few tips on how to minimize (or even avoid) a tax sting when passing the cottage along, according to the Bank of Montreal:

• Pay the tax now: You can choose to trigger the capital gain by transferring the cottage to your children now and paying the tax on any gain accrued to-date. Your family will have to pay the tax on any future gains in value after you pass away, but the amount will be minimal unless the property skyrockets in value – and that’s a good thing.
• Set aside the funds to pay the tax later: Estimate the potential gain in value or pay for a formal appraisal and establish a fund where you – and possibly your beneficiaries – deposit money to cover the future tax liability. A tax free savings account (TFSA) is an ideal way to grow money and avoid further taxes on the gains.
• Use a life insurance policy: The tax-free death benefit proceeds can be used to pay off the estimated capital gains tax after you pass. In the meantime, you – and possibly your beneficiaries – can pay the premiums.   
• Make the cottage your principal residence: If the capital gains on your cottage property are greater than the gains on your primary home, on an average per year basis it might make sense to shift the cottage to your principal residence.

When it comes down to it, consulting a tax professional may also be a wise move. Closing up the cottage is enough of a chore.   

Dale Jackson is BNN's Personal Investor. Follow him on Twitter @DaleJacksonPI