Recent changes to Canada’s capital gains inclusion rate have sparked fresh confusion among some property owners about how this will affect them, while others are just realizing for the first time that the capital gains tax might apply to them.
Anyone who owns a second house or condominium should already know the tax applies to the sale of those properties. What people might not realize is that it also applies when an ownership of an eligible property or investment is transferred or “passed down” to, for example, children or grandchildren.
Here are some of the lesser-known ways the capital gains tax might apply to you, and expert tips for navigating it.
How it works
The capital gains tax applies to most properties and investments whose value increases over time and which are sold for a profit. Some things that gain value are exempt from this specific tax, such as primary homes and goods purchased and sold as part of a personal business.
If you sell something that is not exempt from capital gains taxation and the sale nets you a profit of $1,000 or more, 50 per cent of that profit – or capital gain – is subject to capital gains taxation. That rate of 50 per cent is known as the inclusion rate. As of June 25, 2024 if you pocket more than $250,000 or more in capital gains in a year, your inclusion rate jumps to 67 per cent for the portion above that threshold.
Cottages and land
The capital gains tax does not apply to primary homes, but it does apply to secondary homes and investment properties such as cottages and empty land.
It also applies — based on the increase in property value — when one of these properties is gifted or bequeathed to someone else, even if no money is exchanged. This means either the person gifting the property or the person receiving it needs to have money set aside to pay the tax at the time of the transfer.
For properties that have appreciated by more than $250,000, the amount of money required to pay the tax if that property is gifted or bequeathed instead of sold is now higher as of June 25, 2024.
Considerations other than the tax
To most families who own a vacation property, that space represents more than just a building or an investment. It has sentimental value as well. It’s a place where memories are made and family bonds grow stronger.
For this reason, you must consider all elements of owning and maintaining a vacation property when you plan for the future, and the eventual transfer of ownership. These conversations could take place as you draft or update your Will or plan out your retirement.
Often families who own vacation properties think only about the tax considerations when transferring ownership of the property to the next generation. While tax efficiency is extremely important and deserves careful planning, you need to look beyond taxes to see the whole picture.
Many families assume that surely their family would not have significant conflicts, or if they did, they would be able to resolve them on the fly without needing a written agreement. These assumptions are usually predicated on the strength of family bonds. However, when family members pass away and money gets added to the mix, you should never assume that family relationships will remain as they are now.
Every family is different, and the future ownership and stewardship of your family vacation property is a matter of preference. You have a myriad of options for what to do with it: You can sell it, gift it, transfer it in your Will, hold it in a private corporation or family trust.
If you’re interested in the numbers….
Eleven percent of Canadians currently own a cabin. A similar share aims to buy one.
The most sought-after attributes in a vacation property are waterfront (77%) and access to recreational activities such as skiing or water sports (59%).
While we imagine the vacation home as a playground for kids, only 26% are owned by families with children. Most Canadians’ vacation homes are located in Canada, but 21% are outside the country.
The median price of a single-family home in B.C.’s vacation hot spots at the end of 2023 was $1,086,500, up 0.3% year-over-year. Single-family waterfront properties averaged $2,295,400 down 8.7%. Vacation condos cost an average of $415,000, down 6.3%.
An 8,700-square-foot home in Whistler with an 82-foot infinity pool sold for $32 million last July, setting a price record for the resort municipality.
For more information on this, or any other financial matter, reach out to your Arbutus Financial team member.
Sources:
BC Business: Go Figure: We kick back and look at the numbers on vacation properties in B.C.
MNP: Looking beyond tax — planning for the use and ownership of the family vacation property
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