Cottage Q&A: I’m gifting my cottage to my child. Do I still have to pay land transfer tax and capital gains?
Cottage Q&A: I’m gifting my cottage to my child. Do I still have to pay land transfer tax and capital gains?
The short answer to the first question is yes, you have to pay the land transfer tax. Unfortunately, “there is no ‘under-the-table’ when it comes to real estate,” says David Rotfleisch, a tax lawyer and chartered professional accountant, and the owner of taxpage.com. “The land transfer tax applies to almost any real estate transaction, including a transfer of property, and it will correspond with the fair market value of the property,” says Rotfleisch. “If it’s a gift, then the recipient is the one that’s going to pay that tax, but any way you slice it there’s going to be a tax,” he adds.
As for the capital gains tax—which is set to jump from one-half to two-thirds on profits for capital assets over $250,000 on June 25, 2024—you’ll have to pay that too. “A gift to a child is considered the same as a sale and will be subject to capital gains taxation,” says Rotfleisch. However, Rotfleisch explains that if the cottage is your primary residence, it will only be subject to the land transfer tax.
While you can’t skirt the capital gains tax if the cottage is your secondary property, there are tax-planning strategies that can give you more control over when and how you pay it. One course of action involves an estate freeze. Say your cottage is currently worth $1 million, and you originally paid $500K for it. Chances are, the cottage will continue to increase in value over time, as will your capital gains. To minimize the amount of capital gains tax on the property, Rotfleisch says you can transfer the cottage to a corporation you’ve created, which crystallizes (freezes) the capital gain tax at $500,000 (if done before June 25) and essentially defers the tax. With an estate freeze, the $500,000 capital gains tax will be incurred when you pass, leaving the kids more time to get their finances in order. “Now, you can gift the cottage to the kids at $1 million with no immediate taxation,” says Rotfleisch. “The future growth of the ‘corporation’ goes to the kids, and you as the parents now have an interest in a corporation through shares worth $1 million.”
To find out if an estate freeze could work for you, speak with a lawyer or financial advisor who can provide advice specific to your unique succession situation.