Frequently Asked Questions about Estate Planning
Q: My parents left me their cottage in 1970 and there were no taxes due, why is it different now?
A: Prior to December 31, 1970 there was no tax on capital gains, which meant that capital assets could pass from one person to another without incurring a taxable liability.
Q: My parents passed away in 1992 and left the cottage to me. The executor of their estate claimed both of their $100,000 capital gains exemption and there was no tax due. Can't I do the same when I leave it to my kids?
A: The $100,000 personal capital gains exemption was partially removed for real estate in December of 1992 and was completely removed in December of 1994 from all capital assets unless a capital gains election was declared on the 1994 tax return for the specific property.
Q: My father passed away and left the cottage to my mother and there was no tax due, so why can’t she leave it to me?
A: She can leave it to you, however her estate will still have to report any capital gain on her tax return when the transfer is made and pay any taxes due. The reason your father could leave the cottage and many other assets to your mother and avoid ( in reality delay) the tax was due to something called the spousal rollover. Under certain conditions the CCRA (Canada Customs and Revenue Agency) allows the transfer of assets such as RRSPs, stocks, mutual funds and capital assets such as the family cottage or business to transfer from one spouse to another on a tax deferred basis. The tax is still due when the surviving spouse disposes of the asset (or dies). For more information please fill out our information request form
Q: Can I not just give my cottage to my children?
A: You can gift or give your personal property to anyone, however you will still be deemed to have disposed of this property at the FMV (fair market value), and this amount less the ACB (adjusted cost base) has to be included in your tax return for the year of disposition. If the amount is greater than the ACB or any capital reserve previously claimed then the result will be a capital gain. Depending on your personal situation this option may work. compare with our Options Chart, or fill out our information request form for more information.
Q: Can't I sell my cottage for a nominal amount?
A: Yes you can. However, as with giving it away, you will be taxed as if the property was sold for its fair market value (FMV). CCRA (Canada Customs and Revenue Agency) deems the fair market value of a property is the price paid by a willing buyer to a willing seller in a fair market over a reasonable period of time. This could mean that assets sold below FMV or at "Fire Sale" prices in-order to raise cash quickly may be taxed at the FMV and not at the price they were actually sold for.
Q: My lawyer says that I can just sell the cottage to my children for a nominal amount and avoid the issue. Is this the case?
A: You can transfer your property for a nominal amount and avoid paying land transfer costs at FMV. HOWEVER the FMV still needs to be recorded in your annual tax return and you will be taxed on this amount. Often many professionals only address the issue that is brought to them (e.g. A lawyer may focus on the legal issues of the transfer and not the tax issue, or an accountant might assess the tax issues and not the legal issues.) Check up our Options Page for more information. A personal financial planner will look at all the issues as they affect you and your family and recommend that best option for all concerned given your personal situation. For more information please fill out our information request form
Q: Can I claim the cottage as my principal residence and avoid the tax issues?
A: This is one option that can work for some people but it is dependent on your personal situation. If this strategy is carried out incorrectly you or your estate could be subject to penalties or fines from CCRA. fill out our information request form for more information in regards to this option.
Q: Can the cottage be registered in my spouse's name so that they can claim the principal residence exemption?
A: While this may have worked in the past, CCRA now only allows one principal residence exemption per couple (married or common law).
Q: Can the cottage be registered as my son's or daughter's principal residence?
A: This is another option that works for many families; again there are risks involved that need to be addressed. Also in the year the transfer is done you will have to include any existing capital gain on your tax return and pay the tax due. One of the issues that must be addressed if changing ownership is the possible loss of control over your property. Another issue is that the property now forms part of your child's assets and could be subject to creditor risk or it might form part of his or her net family property. For more information on the benefits or risks of this option please view or Options Chart or fill out our information request form
Q: Can I transfer my cottage to a family corporation and avoid the taxes?
A: This is also an option that works for many families. This option can be very complex and sometimes costly, but offers a lot of flexibility and some protection. There are often more economical options that can accomplish the same goals without the costs and annual administration of a corporation. For more information view our Options Chart or fill out our information request form
Q: I know a couple who transferred their cottage to their children and they did not have to pay any tax. Why can't I do the same?
A: Maybe you can. Since everyone's personal situation is unique, what may have worked for someone else may not work for you. Also keep in mind although some people may not have paid any tax, it doesn't mean they didn't owe any tax. Many people neglect to make the proper claims and could face fines or penalties from CCRA in the future. For more information view our Options Chart. To discuss your personal situation please fill out our information request form
Q: Can my children not use other money from my estate to pay for this tax liability?
A: Yes, provided there is sufficient liquid funds in your estate to cover the tax liability. Keep in mind that CCRA requires payment of any taxes due within 6 months or April 30th of the year following the death of the previous owner. Also keep in mind that some of the liquid assets in your estate could also be subject to taxation upon your death so the amount of money left behind may not be as great as you think it is (e.g. RRSPs, LIRAs, RRIF's, LIF's and several other assets are subject to full taxation upon your death). Leaving your $200,000 RRSP/RRIF to pay for a $200,000 tax bill on the family cottage will leave your estate about $100,000 short. View our Universal Solutions page for more information Again this is a personal and complex situation; for more information please fill out our information request form
Q: I have heard that you can purchase an insurance policy to pay the projected future tax costs. How does this work?
A: This is often referred to funding your future tax liability with discounted dollars. This is again an option that works very well for many families since it is often the easiest to set up, offers the most flexibility, and may be the least complex and least expensive. View our Universal Solutions page for more information on this option. Many people believe that this is not an option for them as they feel that the insurance cost is too expensive or that they are too old to be insured. However with recent medical advances and the introduction of Universal Life Tax Preferred Guaranteed Estate Planning Policies it is feasible for the vast majority of applicants. For more information on this option please fill out our information request form or compare this option using our estate planning Options Chart.