Real Estate Strategies
We can help you access money to buy or build a home through the RRSP Home Buyers Plan and can help you understand your options when it comes to transferring your vacation property to your children or another owner.
Home Buyers’ Plan
The Home Buyers Plan (HBP) is a program that allows you to withdraw up to $35,000 from your registered retirement savings plan (RRSPs) to buy or build a qualifying home for yourself if you are a first-time home buyer or for a related person with a disability. To qualify, you must meet the following conditions:
- You must enter into a written agreement to buy or build a qualifying home. The agreement may be with a builder or contractor, or with a realtor or private seller. Obtaining a pre-approved mortgage does not satisfy this condition.
- You must intend to occupy the qualifying home as your principal place of residence
- Your repayable HBP balance on January 1 of the year of the withdrawal must be zero.
- Neither you nor your spouse or common-law partner can own the qualifying home for more than 30 days before the withdrawal.
- You must be a resident of Canada.
- You must buy or build the qualifying home before October 1 of the year after the year of withdrawal.
If a condition is not met while you are participating in the plan, your RRSP withdrawal will not be considered eligible. You will have to include the RRSP withdrawal as income on your income tax return for the year you received the funds. You must repay the money you withdraw from your RRSP over a period of not more than 15 years. You will not have to pay income tax on the money you withdraw as long as you replace it within 15 years. Because you already received the tax benefit for the money you withdraw, your replacement payments must be made with your after-tax income. The repayment period begins two years after the year in which the withdrawal is made.
Vacation Property Transfer
There are a number of approaches that cottage owners can consider when it comes to transferring the property to the next generation, each with its own unique set of pros and cons.
One of the simplest means of realizing capital gains is by gifting the property to your children. Since this is something which would normally be done upon death in any event, it accomplishes this goal while at the same time providing income tax advantages. The obvious disadvantages of this alternative, however, is that all control is lost over the property. Once a gift is made to the children, it is theirs to deal with as they see fit. They could sell or lease the property without your permission and could even deny you access to the property.
Alternatively, you could transfer the cottage to a trust. This would allow you to retain a greater degree of control. If for example, you appointed yourself a trustee of the property, you could determine how the property was used during your lifetime and you could decide which one (or more) of your children ultimately became the owner of the property. While a trust has certain advantages, it is somewhat more cumbersome and complex (and therefore expensive) to establish and maintain. It is for this reason that this alternative, while perfectly viable in the right circumstances, is frequently not chosen.
If a trust is not your style, you might consider a sale of the property to your children for some agreed upon price which approximates fair market value. Rather than taking cash in exchange (which the children probably would not have anyway), the parents could take back a non-interest bearing demand promissory note secured by a mortgage on the property. Thus while the debt would not cause any immediate financial burden to the children, it would be a rather effective tool in the hands of the parents who could re-acquire the property at any time simply by calling the note. This presumes that the children would default — if they were able to summon sufficient financial resources to actually pay off the note, they would own the cottage. Another disadvantage of the sale option is that land transfer tax would be payable.
Although somewhat more unusual than a transfer to children, occasionally individuals will consider transferring ownership of a cottage property to a spouse. Under the general rules of the Income Tax Act, a property transferred from one spouse to the other occurs on a tax deferred basis. However, there’s an election available under the Act which permits a transfer to take place at fair market value. On a transfer to a spouse where this election is made, a capital gain can be triggered which is eligible for the gains exemption.
Assuming that relations between the spouses are good, a simple transfer ownership between them would allow the proper control of the property to be retained. However, there are a couple of other points which should be considered. For example, if a cottage property is jointly owned, and if one spouse transfers his or her interest to the other, the cottage will form part of the cottage owner’s estate for probate purposes. On the other hand, if the property remained jointly owned, the property would not need to go through probate upon the first death.
Although, not commonly recommended, it is possible to establish a non-profit family corporation to hold a vacation property. The required capital gain could be triggered on the transfer of the property to the corporation. The cost and complication of the paperwork necessary to establish and maintain even a nonprofit corporation will normally outweigh any tax benefits, particularly when less complicated alternatives are available. Nonetheless, there are solutions where this has been done successfully.
Cottage owners often look at these properties as great family monuments which should be passed down from generation to generation. However, before you do anything, we recommend that you ask your children if they even want the cottage. They may not be as interested in the family cottage as you are, they may not have the money necessary for the upkeep of the property or they may be concerned about disagreeing with siblings regarding how the property should be managed.
What it all boils down to is this: there are many methods of doing some effective tax minimization strategies with vacation properties. And while each method has its own pros and cons, the plan ultimately chosen is far less important than the willingness of the parties to make it work.