A CIBC poll has found that 70% of Canadians leaving assets to their heirs plan to leave real estate. Unfortunately, most Canadians are woefully unprepared when it comes to the important issue of tax and estate planning. Many could face a big capital gains hit as a result of this unprecedented transfer of wealth.
But advisors face a tremendous opportunity to add value with existing clients interested in leaving real estate in their wills.
"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," said CIBC’s Jamie Golombek, managing director for tax and estate planning. "With professional advice and advance planning, you may be able to mitigate some of the challenges that arise from owning multiple properties."
A big real estate conundrum for many is how to deal with the transfer of the cottage. Golombek recommends that anyone planning to do so have a discussion with their family to ensure that everyone’s on the same page when it comes to transferring the asset.
In Southern Ontario, for example, a retired couple could have a house in Toronto and a cottage up in Muskoka. Even if they sell the house (principal residence) and move to the cottage on a permanent basis, there will still be a capital gains tax issue once they both pass.
“If you leave the family cottage to the kids one of the big questions is going to be ‘who is going to pay the capital gains tax?’ said Victoria-based Raymond James advisor Sybil Verch. “Is their money in the estate to cover it or will the kids pay it or do you have enough life insurance to cover it?”
In the example of the couple with the home in Muskoka, should they leave the property to heirs a year after moving in permanently, the tax-free portion of the capital gains would be the sale price (assuming it’s sold) less the value of the home when it became the principal residence plus any renovations done after it became the principal residence. Of the remaining capital gains, 50% would be taxable.
That leaves very little to be sheltered under the principal residence rule and a big tax hit as a result.
“Wouldn’t it be nice to leave a legacy and leave the cottage for the family to enjoy for generations to come? It doesn’t quite work that way,” Verch told WP. “The first step is really to have a family meeting so everyone can get their point of view out while the mom and dad are still alive.”