In your case, Terry, it appears like the sale of your half of the family cottage to your niece has already happened, so the secret’s to work out what the tax implications can be.
Can a family holiday home be exempt from capital gains tax?
It depends. A capital gain occurs whenever you sell certain assets for greater than you paid for them. Canada introduced a capital gains tax in 1972. Before that, capital gains weren’t taxable on this country. (More on that later.) However, some assets are specifically exempt from capital gains tax. These include:
- Capital gains from an eligible primary residence
- Capital gains on qualified agricultural or fishing property as much as $1.25 million
- Capital gains from qualified small business stocks as much as $1.25 million
- An incentive for Canadian entrepreneurs of as much as $2 million, phased in at $200,000 per yr between 2025 and 2034.
- Capital gains from investments in tax-advantaged or tax-free accounts, equivalent to registered retirement savings plans (RRSPs), tax-free savings accounts (TFSAs), registered education savings plans (RESPs), first home savings accounts (FHSAs), and so forth.
Ask a Planner: Leave your query for Jason Heath »
Can you claim a vacation home as your primary residence?
You could also be eligible for a primary residence exemption on the proceeds from the holiday home, Terry. A taxpayer and his or her spouse are entitled to designate a property as a primary residence and claim a capital gains exemption for any or all the years it was their property. Before 1982, each spouse could designate one property as a primary residence for a given yr, but after 1981, spouses as a family unit could designate only a single property as a primary residence for every year of ownership. A primary residence may also be a vacation home.
When it’s best to not claim a vacation home as your primary residence
If you furthermore may own a house, Terry, it is probably not useful to say a predominant residence exemption whenever you sell the vacation home. This is since you only own half of the vacation home and never declaring it as your predominant residence could lead to you receiving a much higher tax bill whenever you sell your own home in the longer term.
Let’s say you own the holiday home for 20 years and claim a primary residence exemption on it, Terry. If you owned your own home for 20 years and later sell it after 40 years, you designated one other property as your primary residence for 20 of those 40 years. That makes half of the capital gain – 20 of 40 years – taxable whenever you sell your own home.
Is capital gains tax payable when a property is sold between members of the family?
Selling and even gifting an asset that has increased in value to a member of the family – including a vacation home – may end up in a capital gain. Sales or gifts of assets to members of the family are frequently made at market value, so using an artificially low value just isn’t a viable strategy to reduce or eliminate a capital gain.
An exception to the “market value” rule is when an asset is transferred from one spouse to the opposite. This is generally done at the unique cost, unless you make a special election to transfer the asset at a worth between the fee and market value. However, any resulting income or capital gain could also be allocated to the giving spouse – unless the transfer occurs after death.
