You mention that the deed to the cottage is currently in your name only. This suggests that it was either at all times in your name or that the cottage was jointly owned together with your husband and had the best of survivorship. My guess is that it was jointly owned with the best of survivorship, meaning that it was transferred on to you upon your husband’s death. This signifies that it was transferred outside of his will, no matter his wishes contained therein.
Ask a Planner: Leave your query for Jason Heath »
Are there capital gains while you inherit a vacation home?
Sometimes the ownership structure of an asset is more necessary than a will and that may very well be the case here, Jill. When an asset passes to the surviving spouse upon their death, it’s going to by default pass at its adjusted acquisition cost for tax purposes, meaning there isn’t a capital gains tax to pay at the moment. The executor may decide to have some or all the capital gain taxed on the deceased’s final tax return if that is helpful, but let’s assume that did not occur. This signifies that any capital gains accrued have been passed on to you and this is essential since it pertains to the following steps you are taking with the vacation home.
Do you could have to share an inherited holiday home?
You might not be legally obliged to incorporate your three stepchildren within the ownership of the cottage, Jill, because the cottage was not transferred in the need as a result of joint ownership. If doubtful, you need to seek legal advice. It feels like you might be at the very least morally obliged to incorporate your stepchildren within the ownership, but it’s going to end in a present to your husband’s children – and subsequently has tax implications.
Tax-exempt
Because the accrued capital gains have all passed on to you, in the event you gift them three-quarters of the cottage, you’ll personally be subject to a capital gains tax liability within the 12 months of the transfer. Some people think they’ll avoid capital gains tax by making the gift for $1 or something such as cost, but that isn’t the case in Canada. The transfer of property should be at market value, which suggests the appraisal you suggest could also be relevant, Jill. An appraisal isn’t mandatory in determining the market value of a transfer, but could also be advisable.
Provided you could have sufficient funds to pay the capital gains tax, you could have nothing to fret about. However, if you could have owned the vacation home for a very long time, the capital gains tax bill may very well be quite high.
Keep in mind that there are alternatives. You could treat the cottage as your primary residence and make the transfer to your stepchildren tax-free, but that may make your city home subject to capital gains tax while you sell it or after your death.
You might want to weigh up the professionals and cons of paying tax today versus deferring tax to make your mind up whether it is helpful to make use of the fundamental residence exemption for the vacation home. You may be restricted from doing so in the event you had a previous fundamental residence which you sold throughout the time you owned the vacation home and treated it as your fundamental residence without paying capital gains tax. This would cancel out the years you owned the vacation home and claimed one other fundamental residence exemption.
