Tax on a Second Home
- If there is not enough liquidity in the estate to pay the tax, the children could be forced to sell the property in order to pay the tax bill.
- If the secondary residence is left to one heir, an adult child, for example, but other assets - such as the primary residence – is left to a surviving spouse, it could create conflict. The secondary residence would be taxable but the primary residence would not.
- Similarly, if the children have different intentions as to how the property should be used, the fact that it comes with a tax bill could aggravate the situation.
A Few Strategies
- Purchase Life Insurance
This is the most common solution. A life insurance policy covering future capital gains tax on the secondary residence might not be too expensive for the home owners to purchase, and the children as heirs could even pay the premiums themselves. Such a policy might also cover taxes payable on the disposition of the parent’s RRSP, RRIF and taxable investments, which could allow the children to inherit the capital intact.
- Increase the Adjusted Cost Base
Since capital gains are calculated based on the adjusted cost base of the property, it could be extremely important to document any major renovations done over the years. In our illustration above, if $200,000 had been invested in improving the property, the adjusted cost base might rise to $550,000 and the taxable capital gain would be $100,000 instead of $175,000.
- Make the Secondary Residence the Principal Residence
Under certain conditions, the law allows you to designate the property of your choice as your principal residence. Provided you meet the conditions, you can then choose which property to shelter from capital gains tax: if the country cottage is likely to generate a higher tax bill, it could be to your advantage to designate it as your principal residence. Your heirs will still have to pay the capital gains tax on the other property, but the tax bill will be lower than it might be otherwise.
- Transfer Ownership of the Secondary Residence While You Are Alive
Ownership of the property may be transferred to children while the parent is still alive, either as a gift or via a family trust. The property will then be considered to have been sold at its fair market value, and the parent will have to pay the capital gains tax immediately. However, any future capital gains will accrue to the children when they die or sell the house. In provinces where estates are subject to probate fees, this strategy might also reduce the value of the estate, and thus reduce the fees. Note that a number of conditions apply.
And Consider What the Beneficiaries Think
As you might imagine, seeking informed advice when incorporating a secondary home into a will and estate plan can make a huge difference when the property is transferred.
The following sources were used in preparing this article:
Canada Revenue Agency, « Reporting the sale of your principal residence for individuals (other than trusts) ».
Desjardins, « Impôt et legs d'une résidence secondaire : démêler le vrai du faux ».
Financial Post, « The tax hassles of owning and selling a cottage or second home », août 2017.
Les Affaires, « Maison en héritage : les impôts après la mort », août 2015.
Sorbara Law, « Estate planning for the vacation property ».