Closing the cottage this weekend? Time to also open the books
to determine what it's worth and any future tax
implications
TORONTO, Oct. 8, 2015 /CNW/ - Many Canadians expect to
leave vacation property in their wills but the rapid rise in real
estate values could leave them or their heirs with a major tax
bill, says Jamie Golombek, Managing
Director, Tax and Estate Planning, Wealth Advisory Services at
CIBC (TSX: CM) (NYSE: CM).
"If you plan to sell or pass down real estate to the next
generation you may be subject to a host of tax and estate planning
issues that could not only cost you or your heirs a lot of cash,
but could even force the sale of the property," warns Mr.
Golombek.
"Advance planning may help to avoid the capital gains tax
altogether or defer paying it as long as possible," he says. His
report, "What's up dock? Tax and estate planning for your vacation
home," provides guidance on tax efficient ways for Canadians to
transfer or sell vacation properties.
70 per cent of Canadians expecting to leave assets plan to
pass down real estate
A CIBC poll found that 70 per cent of those Canadians expecting
to leave assets plan to pass down real estate upon their death.
When it comes to having conversations about transferring wealth,
the poll also found many Canadians had not discussed it with their
family or a financial advisor.
"The first step to the successful transfer of real estate is to
initiate an open, honest conversation with your family," says Mr.
Golombek. "This is particularly important when planning for the
transfer of an asset such as a home or cottage where children's
plans for the future might not always align with parents'
expectations."
Tips on transferring real estate
The key to deciding how best to transfer your property is to
understand how the gains from the disposal are taxed: A principal
residence will not trigger capital gains and home owners are free
to decide which property they designate as their principal
residence, Mr. Golombek advises.
"Even though you may have a property that you consider to be
your principal residence, such as the family home where you live
most of the year, another property, such as a cottage or even a
vacation property located outside of Canada, can be your principal residence," he
says.
The principal residence exemption (PRE), however, can only be
applied to one property per taxation year. If the gain from the
sale of a property is not reported on your tax return, it will be
assumed that this was your principal residence for the years you
owned it, precluding you from using the exemption for your other
property for the years of overlapping ownership.
"You should make a conscious decision whether or not to claim
the PRE when you dispose of a property," cautions Mr. Golombek.
"Considering the past appreciation in value and the potential for
future increases, it may make sense to save the PRE for the
property with the most gains."
While capital gains on the disposal of a second property cannot
be avoided altogether, there are strategies to reduce or defer the
tax liability, including life insurance, the use of a trust or a
corporation.
"Passing on the family home or cottage is not an easy decision
to make, particularly since a great deal of emotion is attached to
it," says Mr. Golombek. "With professional advice and advance
planning, you may be able to mitigate some of the challenges that
arise from owning multiple properties."
About CIBC
CIBC is a leading Canadian-based global financial institution
with 11 million personal banking and business clients. Through our
three major business units - Retail and Business Banking, Wealth
Management and Wholesale Banking - CIBC offers a full range of
products and services through its comprehensive electronic banking
network, branches and offices across Canada with offices in the United States and around the world. You
can find other news releases and information about CIBC on our
corporate website at www.cibc.com/ca/media-centre/.
SOURCE Canadian Imperial Bank of Commerce