Steer clear of pitfalls, and benefit from tax advantages.

REALIZE YOUR VACATION PROPERTY DREAM

By Colleen Gibb, FCA, CFE, Partner, Gibb Widdis, Ancaster and Immediate Past-Chair of the Institute of Chartered Accountants of Ontario

Some of life’s most cherished memories are of slow, sweet summer days spent at the family cottage. We may even dream of creating similar memories for our own family – but when it comes to vacation properties, the cost of inadequate tax and estate planning can be high.

Part of the challenge is avoiding the vast amount of misinformation out there. You may have heard of someone renting out his or her property for a few weeks a year in order to write off all costs, including depreciation; or of someone buying a U.S. property through a Canadian company to avoid American estate tax. While these strategies may be beneficial under specific circumstances, unhappy consequences due to inadequate knowledge are more common. (Claiming depreciation of even a few dollars on a primary residence, for example, can result in having to pay tax on the entire capital value increase on the home.)

For people considering the purchase of a vacation property, the first question to ask is a personal one: What do you really want out of the property? While we may have optimistic notions of combining our vacation dreams with our investment objectives, Canada Revenue Agency sees them as quite separate, and the criteria for investment-related deductions may be difficult to meet.

It’s important to be clear on your objectives, because although some vacation property values have been soaring recently (along with real estate in general), historically, values have tended to stay relatively flat. Time-share purchases can be particularly disappointing from a financial perspective; in bankruptcies, these ‘assets’ are usually valued at zero.

If you want to pass your cottage on to the next generation, minimal capital appreciation might even be a good thing. It’s the actual capital appreciation that is most vexing to many family cottage owners: if the cottage has been owned by Mom and Dad for 40 or 50 years, its value may have increased ten-fold or more.

Any increase in value becomes taxable when the last spouse passes on, and if provisions haven’t been made to pay those taxes from the estate, tragically, the property may have to be sold. Even if that can be avoided, conflict can occur when the children realize that property taxes, utilities, and maintenance costs are now their responsibility.

Involving a Chartered Accountant in your vacation property planning can ensure that you steer clear of the pitfalls and benefit from the tax advantages. For example, prior to 1982, each person in the home was entitled to designate a property as a primary residence. Therefore, if you owned your cottage before 1982, potentially a portion of the increase in value can be sheltered from tax. Even if you’ve bought since 1982, the right decision about which property to use as your personal exemption can be very profitable.

A CA can also help ensure that your estate plans come to fruition and avoid hardship or acrimony among your children. Ultimately it isn’t just about money – it’s about ensuring those sweet memories stay that way.

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ICAO July Vacation.pdf	303.34 KB