Effective June 25, 2024, Federal Budget 2024 proposed to increase the capital gains inclusion rate from 50% to 66.7%. Individuals will have an annual $250,000 capital gains safe harbour at which the old inclusion rate will continue to apply. This change has many Canadians reconsidering their succession plans for their family cottages and asking whether it’s better to sell their property or gift it to the next generation.
What do the changes mean for me?
With the increase to the capital gains inclusion rate, selling your cottage after June 25th could result in higher tax implications. In the end, more of the profit you make from selling the cottage would be subject to income tax under the proposed changes. If implemented, this means that up to 66.7% of capital gains from the sale of assets would be included in taxable income.
For instance, if you sell a cottage for a profit of $100,000 under the current system, only $50,000 (50%) of that profit would be subject to income tax. However, if the proposed changes are enacted, and you have capital gains from other sources in excess of $250,000 in the same year, $66,700 (66.7%) of the profit from the cottage would be subject to tax.
Is gifting our property an option?
Gifting your cottage to the next generation may be a more tax-efficient option depending on the circumstances. If done before June 25th, the old inclusion rate would still apply. However, if the transaction is done after June 25th, it may offer certain advantages even under the proposed changes. For example, gifting a partial ownership in the cottage in smaller increments over a period of years may help to spread the amount of gain recognized each year in order to continue to benefit from the annual lower inclusion rate on the first $250K. If there’s a mortgage on the cottage, you usually need the lender’s approval for the transfer. Also, selling a cottage can be costly because of land transfer taxes. However, gifting the cottage isn’t considered a sale, which might let you avoid paying these taxes. This isn’t a solution that fits every situation, and you should carefully consider your individual circumstances.
The decision of whether to sell or gift a cottage should consider individual financial circumstances and long-term plans, which may include but are not limited to future holding period, cost of debt, and expected future growth rates. Carefully consider factors such as future financial needs, estate planning goals, and potential tax implications when evaluating your options.
Given the complexity of tax laws and the potential impact of the proposed changes, we recommend you consult with tax professionals or advisors to evaluate the best course of action based on your specific situation.
