The ABCs of the ACB
Thinking of selling your cottage, cabin, or recreational property? Unless it’s truly your principal residence, the Canada Revenue Agency (CRA) will want its share of any capital gain you make on the sale. It calculates the capital gain as the proceeds of the sale minus the cost of selling and the adjusted cost base (ACB). Here’s where you can find ways to cut the tax take. But a note of caution: The CRA are fully aware of ACB games people play with cottage sales, so ensure that all the components of the ACB are documented and are all bona fide.
Calculating the ACB
Here’s what the CRA is likely to accept in your adjusted cost base.
Costs of acquisition. The original purchase price or some proof of value if the property was a gift or inheritance. If you or your parents or grandparents made an election to increase the ACB in 1994, you’ll need some evidence of that. Other costs of acquisition include such things as legal and inspection fees, land transfer taxes, sales commissions, survey, title insurance, and repairs to upgrade a property that was in disrepair, but you’ll have to prove that the original purchase price would have been higher without these repairs.
Other property improvements. These include items such as a new water system, well, septic or holding tank, property drainage improvements, fixed decks and docks, and access driveway. These can be included in the ACB if they are “new” and not a result of ongoing maintenance.
Qualifying renovations. These introduce elements that weren’t part of the cottage before. For example, a bathroom (and all the fixtures), or a new deck, or even a couple of new bedrooms that expanded the size of the cottage would likely be accepted in the ACB.
The CRA determines whether an ACB item is ongoing maintenance or an improvement by assessing whether the building has actually been improved or only restored to its previous state. For instance, a coat of paint won’t count, but an upgrade from rotting wood siding to quality aluminum or brick would.
The principal residence conundrum
To get around paying capital gains tax on the sale altogether, you can designate your vacation property as a principal residence and claim the principal residence exemption on it. But you’d do this only if it makes financial sense – for example, if the average annual gain on the vacation property exceeds the gain on your home.
Remember, too, that unless you report the gain on the sale of your vacation property, the CRA will assume you have designated it as your principal residence. So be sure to discuss which property to designate as your principal residence with your financial planner before you put that cottage up for sale.
Transferring the title to the recreational property to your kids or grandkids, or holding title in joint tenancy cannot be used to circumvent the tax bill. The CRA will still treat any such transfer as a deemed sale, and demand you pay capital gains tax.
Some owners try to keep a cottage in the family without incurring a deemed sale by holding the property “in trust.” But you actually have to create a trust for this purpose and go through all the legal procedures to make this happen. The CRA is highly skeptical of claims for recreational properties held “in trust” where no legal trust exists. So if you want to create a trust, you’re going to need expert legal help.
Rather than going through all these machinations, many cottage owners simply opt to purchase life insurance that will cover the tax on the deemed sale of the property on the death of the owner. Here again, you’re going to need some knowledgeable financial help, because it’s easy to buy too much insurance.
© 2018 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited. This article is for information only and is not intended as personal investment or financial advice.