Tax Considerations When Transferring Your Cottage to Family 

Before making a decision to gift or sell your cottage to a family member, it’s crucial to understand the associated tax implications. 

• Taxable Capital Gain: When you either sell or gift your cottage to a relative, it can result in a taxable capital gain. This gain is determined by the difference between the original purchase price of the property and its current fair market value or the selling price at the time of the transfer. 

• Ways to Minimize Capital Gain: 

• Principle Residence Exemption: If you can prove that you’ve consistently occupied the cottage, you might be eligible for the principle residence exemption. This allows for a tax-free transfer, whether it’s a gift or a sale, to a family member. 

• Maximize the Adjusted Cost Base (ACB): The ACB of a property is essentially its initial purchase price. However, any improvements made to the property, such as a new roof or flooring, can increase the ACB. A higher ACB means a lower gain when you decide to gift or sell the cottage. It’s essential to keep receipts to validate the improvements you claim. 

• Selling Strategy: Instead of gifting the cottage to your children without any cost, think about selling it to them at its fair market value. A useful approach is to spread the payments due over five years. By doing this, the Canada Revenue Agency (CRA) permits you to claim a capital gains reserve, which essentially allows you to distribute the capital gain over a five-year span. This strategy benefits both parties: you get to reduce your taxes, and your children have more time to repay you. 

• Inheritance: If you bequeath your cottage to your spouse in your will, the transfer of assets won’t be subject to capital gains tax upon your passing. 

Tip: Before transferring your cottage to family, always consider these methods to potentially reduce your capital gains tax.