In the simplest terms, capital gains are ‘gains’ usually monetary, obtained from the sale of capital property. Capital property can be real estate or securities like shares and stocks. The gains are the positive difference between what you paid for the item and what you sold it for, minus any legitimate expenses connected to it and the sale of it.
In Canada capital gains are taxed based on your marginal tax rate, which varies by province. However, only 50% of the gains are taxable. For example, on a capital gain of $100,000, only $50,000 would be taxable. So, for a Canadian in a 33% tax bracket, a $50,000 taxable capital gain would result in $16,500 taxes owing. The remaining $83,500 is the sellor/investors’ take. (The Canadian Revenue Agency offers step-by-step instructions on how to calculate capital gains.)
When it comes to vacation properties like cabins, capital gains are the difference between the purchase price and the selling price, minus the cost of any enhancements (not including ongoing upkeep) made to the property.
For the sake of this discussion, let us consider:
- A family cabin purchased for $100,000 and worth $500,000 today
- The cabin is owned by a mature couple (parents) with two adult children
For this example, assume the parents’ will is set up to transfer their share of the cabin between the couple after the first of the pair dies and then to their adult children after the last parent dies.
In this case, the capital gains wouldn’t be triggered until the last parent dies and the cabin transfers to the adult children. The capital gains tax would be due immediately as the asset, cabin, is deemed to have been sold to the second generation once the remaining parent dies. So, capital gains would be calculated based on today’s $500,000 fair market price minus the original $100,000 purchase price, with 50% of the $400,000 capital gain taxable.
During the time the cabin was owned by the parents if any capital expenditures were done, outside regular maintenance, like an addition for example, the costs associated with that addition can be subtracted from the overall capital gains.
For the purpose of this example, an addition was done and cost $50,000, leaving $350,000 as the capital gains and $175,000 as the taxable portion of the capital gain. The capital gains tax will be payable by the estate at the marginal tax rate of the estate. If the estate is rich in property and low in investments or cash, a sale of one of the properties may be needed to pay the taxes.
There are many variables involved in transferring a cabin between generations. Some of these variables include: primary residence status, multi generational transfer with multiple kids, joint owners, blended families, and more. It is easy to see how important planning for the cabin’s transition is and how complex it can become – it is worth the time invested to ensure the family cabin is passed onto the next generation in the most tax efficient manner.
There is no way to avoid paying capital gains tax. However, there are ways to plan when to incur tax and be prepared to cover the cost. Connect with us to learn more about what you can do to prepare for your cabin’s future.
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