written on behalf of Feigenbaum Law
As we head into May, we also head into the beginning of cottage season- a favorite time for Canadians.
While many of us are starting to think about heading up north in the coming weeks to kick off a summer of boating, barbecues and other summer time fun, it may also be a good time to think about the various financial and legal implications of owning a vacation home.
Below we address some commonly asked questions.
What Are the Tax Implications of Renting my Cottage Out?
Renting out your cottage during times you are not there is a good way to offset some of the often-steep costs of owning a vacation property. Renting out your space is becoming especially popular with the rise of sites and apps such as Airbnb, VRBO, and similar.
Even though there can be financial benefits to renting out your cottage, if you do decide to rent out your summer space there are some important tax factors to keep in mind and remain on side of the CRA. Namely:
⦁ All rental income must be added to your other income generated during the tax year;
⦁ Expenses related to the cottage (e.g. property taxes, insurance, utilities, internet, cable, etc.) can be claimed to offset this income;
⦁ Expenses must be claimed based on the amount of time the property is rented out versus the amount of time the property is used by the property owners. For example, if the cottage is rented out for ¼ of the full year, and used by the family for ¾ of the year, expenses can only be deducted at a ¼ rate;
⦁ Other expenses, such as the cost of significant repairs (e.g. roof replacement, septic system replacement, etc.) are considered capital costs, and can be deducted over time.
What Do I Need to Know if I Co-Own My Cottage?
With property prices skyrocketing, and cottages being transferred inter-generationally as baby boomers age, co-ownership of cottages is becoming more and more common.
If you co-own your cottage with your siblings, other family members, or even friends, there are some important legal concepts to keep in mind.
Joint ownership can be done either through a joint tenancy or through being tenants in common.
Where a cottage is held in joint tenancy and one of the owners dies, the property subsequently belongs to the remaining joint tenants. If there are two joint tenants, the remaining tenant ends up with full ownership of the property (if there are multiple joint tenants, the last remaining joint tenant will end up with full ownership). The will or estate plan of that remaining joint tenant will determine what happens to the cottage after that tenant passes away. Probate fees are not paid until the death of the final joint tenant.
Conversely, if the cottage owners are tenants in common, each of them own a proportionate share in the property (i.e. 50% each if there are two owners, 25% each if there are four owners, etc). Each of those owners can dictate, in their will or estate plan, what happens to their respective share.
What If I Want to Transfer the Cottage to My Kids?
There are tax considerations that must be taken into account when transferring a cottage to your children.
If you transfer your cottage to your children, either as a gift during your lifetime, or in your will upon your death, your children will likely have to pay capital gains tax. Given the current property value of most cottages, this will likely be a significant amount on which income tax will have to be paid.
A principal residence exemption may be available as a shelter if you can establish that the cottage was your primary residence.
Importantly, if you are a U.S. citizen transferring or gifting a cottage located in Canada, or if you are transferring or gifting a cottage located in the U.S., there could be additional American estate taxes that apply.
If you deem your cottage as a principal residence but you also continue to rent it during some parts of the year, there may be significant capital gains implications.
While there is a capital gains exemption on principal residences, if the CRA audits you and concludes that your cottage is an “income-generating business” the capital gains exemption may not apply.
The above are only some of the major tax and other considerations that must be taken into account if you are a cottage owner.
Before you take any action with your cottage, including listing it on AirBnb or otherwise renting it out, or making plans for what will happen to the property in the future, it is advisable to speak with a tax professional.
How Can Feigenbaum Law Help?
If you have questions about personal tax planning, including tax planning as it relates to major assets such as real estate, contact Feigenbaum Law.
Our goal is to create the best tax strategy possible for our clients. We work with you to create a personalized solution that will streamline your compliance requirements.
Our focus is complex matters related to tax planning for individuals with high net-worth. We offer services to clients in the US, Canada and around the world.
Contact us to learn more about how we can help or call us at (416) 777-8433 or toll free at (877) 275-4792.