Back and forth leaves clients with a few considerations and a deadline extension
For all the joyous memories Canadians associate with their cottages, cabins, chalets and camps, the vacation properties that we flock too each summer can come with a host of tax and estate headaches. This summer comes, too, after the government’s proposed, implemented, and then revoked hike to the capital gains inclusion rate. That policy mess was particularly challenging for cottage owners, many of whom sold a property before the June 2024 deadline to ensure only 50 per cent of their gains were taxable. Now advisors have to manage a set of clients still grappling with the fallout from that decision.
Aurèle Courcelles, VP, Tax and Estate Planning at IG Wealth Management outlined many of the considerations that clients and advisors need to keep in mind around cottages now. He highlighted issues related to the rushed disposition of a cottage due to the cap gains hike, as well as possible pitfalls and mistakes that could have been made along the way.
“What’s new this year is the result of last year’s proposed changes in the capital gains inclusion rate,” Courcelles says. “They were on, then off, then on, and now they’re off with the current Prime Minister saying during the election that they won’t proceed, so we’re assuming they’re off.”
While the rush to buy, sell, upgrade, or pass on a cottage can be expected at the start of each summer, Courcelles notes that recent proposed changes to the capital gains inclusion rate have made this year somewhat different for cottage owners. The initially proposed policy would have taxed 66 per cent of all personal gains over $250,000 realized after June of 2024. Despite not becoming law before parliament was prorogued in early 2025, the policy was set to be implemented by the CRA, only for an announcement to come out saying it would not be implemented. Under Prime Minister Mark Carney, the Liberal Party has scrapped the proposed hike.
That back and forth was particularly difficult for many cottage owners. As most Canadians would find their personal capital gains on any given year below the $250,000 threshold, the risk of tax on 66% of their gains wasn’t very present. Cottages, however, are real estate assets that could be subject to tax and are very likely to have realized gains over $250,000, especially if they were bought before the COVID-19 pandemic. Those cottage owners who sold properties before June of 2024 in the hopes of staving off a bigger tax bill might be looking for ways to manage the fallout from their decision.
Read more: How capital gains tax waffling created six months of uncertainty for investors | Wealth Professional
While the die has been cast on any sales at this point, Courcelles notes at least that the filing deadline for the reporting of capital gains or losses has been extended until June 2nd of this year. Courcelles notes a few strategies that investors had used to manage the tax rate increase, highlighting where they may have left themselves in an unfortunate situation. If they had transferred the cottage to their children, for example, Courcelles says these clients might be running the risk of pre-paying tax. Whether given as a gift or sold, there are questions of the gain realized, the amount of gains, and the potential bills facing either the client or their children. If the property was sold for below market value, there’s a risk of double taxation as the child’s cost base is now significantly lower than the market value, meaning any gain they eventually realize will be even larger.
For advisors working with these clients, Courcelles highlights the value of bringing in tax experts to consult on any fallout from the sale. He notes, for example, that since capital gains are calculated from a cost base, advisors should work with clients to ensure that improvements, upgrades, and qualifying outlays are incorporated into that cost base. Principal residence exemptions might be considered, in order to offset gains from certain years where someone might have lived in their cottage for a long stretch of time, though Courcelles notes that this could also come with some significant tax implications for a client’s home.
“Step one is make sure that if you have a gain, how small can you make that gain,” Courcelles says.
