Jodi Ramsden, a realtor in Whitby, Ontario, is worried about how the recent changes to the capital gains tax will impact her family’s cottage property. The federal government increased the capital gains inclusion rate for individuals from one-half to two-thirds on gains exceeding $250,000. This means that if someone sells a second property, like a cottage, for a profit over $250,000, they could face a higher tax bill.
Ms. Ramsden, who purchased her cottage for $52,000 in 1999 and believes it is now worth around $1 million, is not ready to sell yet but is concerned about the additional tax she will have to pay when she does. She also fears that the tax increase will negatively impact the real estate market as a whole.
Jamie Golombek, a managing director at CIBC Private Wealth, explains that the increased capital gains tax applies to profits over $250,000, whether it’s from selling an investment property, a family cottage, or passing down a property to heirs. However, there are strategies that can help reduce the tax burden.
For instance, if a cottage is inherited by multiple individuals, each person’s gain is only taxed at the lower 50 per cent inclusion rate for gains up to $250,000. Additionally, money spent on improving the property can lower the overall gain and reduce the tax owed. Keeping accurate records of property improvements is crucial in this regard.
Property owners looking to leave a cottage to their children may want to consider setting aside funds to cover the tax bill. One option is to take out a permanent life insurance policy for the estimated capital gains tax amount, which can provide immediate liquidity for beneficiaries to pay any taxes due.
It’s important for Canadians affected by the capital gains rate change to consult with a financial expert to understand how it will impact them personally. A financial advisor can help develop a plan that outlines all assets and their values, allowing individuals to assess potential tax liabilities and make informed decisions about their properties.
While some owners may consider selling their property to avoid higher taxes on gains over $250,000, it’s essential to weigh the costs associated with buying, selling, and moving against the potential tax savings. Mr. Golombek warns that these expenses could outweigh the benefits of selling, especially if it means sacrificing the enjoyment of the cottage.
In conclusion, it’s crucial for property owners to be proactive in understanding the implications of the new capital gains tax rules and to seek expert advice to navigate the changes effectively. By staying informed and exploring potential strategies to minimize tax liabilities, individuals can make informed decisions about their cottage properties and financial future.