Tax implications of passing on your cottage: Separating fact from fiction


Test yourself! True or false?

Marie-Christine Daignault | Desjardins Group

Updated on June 27, 2018

The tax burden associated with leaving your cottage to your heirs is a complicated topic, and it’s easy to get lost in the details. Angela Iermieri, a financial planner at Desjardins Group, discusses some of the most widely held beliefs and clears up some myths.

True or false? Test your knowledge!

1. In Canada, there’s no inheritance tax.

True. The heir doesn’t have to pay tax on the inheritance, and the estate doesn’t have to pay tax on the value of the property (except in Ontario, where there’s an estate administration tax).[i] However, the deceased is presumed to have disposed of all their property, which can generate a tax liability. The estate liquidator is responsible for paying the deceased’s income taxes and distributing property to the heirs. It’s important to plan the transfer properly, so your heirs receive the maximum possible amount.

2. My estate will have to pay tax, there’s no way around it.

False. Paying income tax is inevitable, but it’s possible to reduce or defer the tax bill and even increase the value of property you leave behind. Some strategies exist to help you reduce the tax burden—like taking out an insurance policy, “rolling” property over to your spouse, or using the principal residence tax exemption—so you can leave more to your heirs and less to the taxman. But you need to plan ahead.

3. If I leave property to my spouse, it’s not taxable right away.

True. You can “roll” property over to your spouse, which defers the tax liability until their death. It may be worth considering using the rollover option for your cottage, RRSPs, additional residences, rental buildings or other investments. When preparing your estate inventory, your advisor—with the help of other partners at Desjardins—will be able to estimate your estate’s tax burden and suggest strategies tailored to your needs to optimize your net worth when you die.

4. I can use the principal residence exemption to avoid paying tax on capital gains for my cottage.

True. If you designate your cottage as your principal residence (even if you don’t live there year-round), you can use the principal residence exemption. This means that part or all of the capital gain from its sale will be tax exempt. However, it also means that capital gains realized on your other property will be taxable for the years where you designated the cottage as your principal residence, because only one principal residence per year is allowed for a couple.

5. A couple can have two principal residences.

False. For the purposes of the principal residence exemption, a couple can only have one principal residence in a given year (since 1982 for married couples and since 1993 for common-law spouses).

6. If I give my cottage to my children during my lifetime, I’ll avoid paying taxes.

False. If you give, transfer or sell your cottage or any other property to anyone other than your spouse, the capital gain will be taxable. The gain is calculated at the time of the transaction if it occurs during your lifetime; if not, the capital gain and tax payable are calculated at the time of death.

7. I don’t have to pay tax on the capital gain for my cottage because I’ve never rented it out.

False. Capital gains are taxable on all property other than your principal residence. It doesn’t matter if it’s an apartment building, a condo in Florida or a cottage.

8. If I sell my house and move into a retirement home, but I spend a few weeks at my cottage every year, the principal residence exemption would apply to my cottage since it would be my only residence.

True. If you spend some time at your cottage each year, you can designate it as your principal residence, the entire time you own it or for just a few years.

9. I don’t need to let the governments know that I’ve sold or gifted my principal residence since it’s my only property.

False. Since 2016, any property sales, including those for which the gain fully qualifies for the principal residence exemption, must be declared on your income tax return the year the property is sold using form T2091(IND).

You might also like: When can selling a property lead to a capital gain?

[i] For more information about the estate administration tax.

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