Sale of a Second Residence

Many of you have a second (or third) residence in a special area that has gone way up in value, thanks to your constant care, improvements and wise choice of location. While your principal residence is sheltered from income tax on a gain in value, the sale of a secondary residence will not be sheltered.

Deciding Which Property to Sell Tax-Free

Of course, the first thing to decide is which one has the biggest increase in value and is likely to be sold soonest. That may help you decide to designate it as the one you will sell tax-free. Another influencer is whether one property is owned in a separately taxing state, like the USA. Then it will be subject to that country’s taxes as well as Canadian taxes. So, you might exclude that one from being a principal residence because the other country will tax it regardless, and that tax will usually be allowed as a credit against Canadian taxes.

Keeping Properties Within the Family

So now you are down to one or two properties in Canada. You want to keep them all in the family ownership, but someday you will be forced to sell or be deemed to have sold upon death. If so, how do you pay the taxes and keep the property in your family’s hands?

Family Considerations

One consideration you may not wish to think about, is that family members may not have the funds to buy it, nor the inclination to pay for it. They may live too far away, or they would love to have it but need their funds for other priorities, like paying for the city house/mortgage. Sometimes one child is very successful and can afford to buy it, but the others can’t. If you arrive at this conclusion, leaving money for your estate may help other children to buy their own properties. That may be the best answer. And you could share the funds equally right this time. (Or maybe you need the cash yourself…)

Complications of Shared Ownership

Sharing ownership of a property is a complicated matter. Who will us it during prime time? How will it be decided. Who will do the season opening work, the closing down work and the regular maintenance? And how will the regular expenses be shared? How will the cash flow be managed? Who will provide the discipline to collect the funds? We have seen a few of these arrangements work, but not many. Eventually, one or another child drops out and is resentful of the enjoyment of the others.

Succession Arrangements

Think carefully about the succession arrangements. How can it be arranged to everyone’s advantage? For the wealthier families, the property can be given to the children and a maintenance bank account can provide for several years of expenses. But even that will break down over time.

Tax Considerations

This is a complicated matter and needs clear thinking and the generosity of all family members to work well. But let’s not forget the income tax man’s share. Mom and Dad will have to pay tax on the disposition of the property, whether by sale or by death. And at today’s prices, this problem is growing bigger than ever. Now the taxman wants tax on two-thirds of the capital gain (formerly 50%). And a large capital gain may also result in an Alternative Minimum Tax, which may never be recovered in subsequent years. So, disposing of the property or having it pass on through your estate are neither desirable probabilities. But such are the complications of wealth and succession. You may need an experienced advisor to help you and your family deal equitably and efficiently through this problem.