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High on the list of all-time most popular personal finance topics are strategies for selling or passing down the family cottage. Cottages can be treasured family heirlooms – that’s one reason. Another is tax-related.
It’s widely known that you can sell a principal residence without paying tax on your capital gain, which is the difference between the cost and the selling price. But if you own a cottage in addition to a house, you can only designate one dwelling as a principal residence. This is why cottages keep generating tax-related questions from readers.
Here’s a sample recently submitted by a reader of this newsletter: “We are seniors and we sold our home four years ago. We live in an apartment for six months of the year, and the other six months we live in our cottage. When we sell the cottage, will we have to pay capital gains?”
Tax matters: Three things to consider when buying a family cottage
For help with this question, I consulted Peter Guay of PWL Capital in Montreal. Coincidentally, PWL recently published a guide to passing on a cottage for families.
Mr. Guay assumed for his answer that this reader and her partner did not pay tax on the home sold four years ago because they used their principal residence exemption. “Based on that assumption, they will have to pay capital gains tax on a portion of the gain in value of their cottage,” he wrote in an e-mail. “They won’t pay tax on the gains of the last four years because it was their only home during that period and they can use their principal residence exemption. The cottage qualifies [for the exemption] because the couple regularly inhabited it and did not own it primarily for the purpose of generating income.”
Mr. Guay said the couple will pay tax on the gain in value during the time they owned both homes concurrently. This is because they already used their principal residence exemption for those years against their city house.
Tax tips: Ensure your cottage can pass to the next generation
To determine the portion of the gain that will be subject to tax, Mr. Guay said they should calculate the total gain in value since they bought their cottage and multiply that by the number of years they owned both properties (minus one year), then divide that by the total number of years they owned the cottage.
Mr. Guay concluded with some tax-filing tips. First, the taxable portion of the gain will have to be reported on Schedule 3, Capital Gains (or Losses) of their federal tax return and the equivalent form for their province, and they will also have to complete Form T2091(IND), Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust).
Catch up on Stress Test
English and French transcripts are now available for the recently completed Season Seven of our Stress Test personal finance podcast for Gen Z and millennials. We cover topics like why more Canadians are giving up on home ownership, the cost of fertility treatments and how climate anxiety is shaping financial decisions. Season Eight of Stress Test is in the planning stage. Suggestions for topics we should cover are welcome. I’m at rcarrick@globeandmail.com
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Rob’s personal finance reading list
Five thoughts on money for high school grads headed to college or university
Practical advice from a non-profit credit counselling agency. The #1 item is huge: Checking into the job and salary prospects for the program you choose.
What home buyers want
A survey of 800 people finds that the must-have features for home buyers right now include a main floor bathroom, natural light and a patio.
Tips for turning a RRSP into a RRIF
A really useful discussion of converting registered retirement savings plans in to registered retirement income funds, a move that must be made by the end of the year you turn 71. Included here is a look at the role of annuities in generating retirement income.
Introducing the Tim Hortons credit card
An advance look at a new credit card that will offer “pretty terrific” rewards on purchases at Tims. The word “woof” is used to describe rewards on other purchases.
Ask Rob
Q: I am trying to decide to buy either the Vanguard Growth ETF Portfolio (VGRO-T) or your recent Freedom .08 portfolio. I have $500,000 in individual stocks spread through various accounts. Looking to go safer with more invested in exchange-traded funds. Should we go Freedom .08?
A: The Freedom 0.08 ETF portfolio, introduced a few months ago, is a simple, well-diversified portfolio of ETFs with a weighted average management expense ratio of just 0.08 per cent. VGRO, which bundles a fully diversified portfolio of stocks and bonds together into a single fund, has an MER of 0.24 per cent. Freedom 0.08 has a mix of 70 per cent stocks and 30 per cent bonds, whereas VGRO has an 80-20 split. The extra cost of VGRO is worth it if you value the simplicity of investing in a single fund that offers rebalancing.
Do you have a question for me? Send it my way. Sorry I can't answer every one personally. Questions and answers are edited for length and clarity.
Tools, Explainers and Guides
Best credit cards that don’t charge the usual 2.5 per cent foreign currency transaction fee on purchases made outside Canada. A few readers have asked about this type of card lately.
The Money-Free Zone
Canadian History Ehx is one of my current favourite Twitter feeds. Always interesting nuggets on Canadian history.
From the Twitterverse/LinkedIn
A Twitter thread on the music industry economics of Spotify
What I’ve been writing about
- AI can build you an ETF portfolio in less than 20 seconds – should you trust it?
- What the Bank of Canada rate hike means for investors and savers who want to park money safely
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More Rob Carrick and money coverage
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Even more coverage from Rob Carrick:
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- ✔️ The housing file: A house isn't special. Get your head straight about the reality of home ownership • The good, the sad and the unaffordable: Saving for a home downpayment in Canada's big cities • Property taxes are popping in some cities - how worried should you be about other tax hikes? • Our other real-estate problem - people have too much wealth tied up in houses • Borrowers and savers, here's how to time the eventual rollback of interest rates
- 📈 Investing: Canada's top digital broker is TD Direct Investing, with an assist from the TD Easy Trade app • 2023 Globe and Mail ETF buyer's guide part one: Canadian equity ETFs • For the ultimate in cheap investing, check out the Freedom .08 ETF Portfolio • Yes, there is risk in Canadian bank deposits for the unwary and complacent • CDIC covers bank deposits, but who protects your investments if your broker goes bust? • Answers to your questions about the low-risk ETF paying almost 5% • Happy fifth birthday to one of the all-time best investing products for everyday people • An investing strategy that wins cleanly over the long term by outperforming in bad years like 2022
- 💰 Your money: Mortgage holders, savers and GIC investors, it’s time to change your thinking on interest rates • How much debt is each generation of Canadians carrying, and how do you compare? • For the sake of their financial futures, young people should leave Toronto and Vancouver • This practical new spin on a savings account might just peel you away from your big bank • Rental fraud grows amid rise in fake, falsified tenant applications • Are Canadians worse off financially now than in the 1980s? • From groceries to auto loans, here’s how much more it costs to live right now • When saving for retirement, should you change your asset mix over the course of your career? • Do retirement income needs always rise alongside inflation? Not necessarily • When the bank suggests you lock in your variable rate mortgage, it has an angle
