Investors beware! The hidden costs of cottages

An increasing number of Canadians are now passing family cottages on to children, inclined to view those retreats as rental properties. But there are several challenges associated with cottage investments that aren’t all sunshine and canoe trips, warn experts.

Christine Van Cauwenberghe, the assistant vice-president of tax and estate planning at Investors Group, told CREW on Tuesday that vacation properties have quite a few unique expenses of which potential owners might not be aware – the most glaring of which are the tax considerations.

“The main thing with a cottage is that people have to understand that when you are passing on a cottage to someone else – to family, say – there is a potential capital gain,” Van Cauwenberghe said.

Van Cauwenberghe explained that when you dispose of assets – via inheritance, for example – it may trigger a capital gain that will equal the fair market value of the property less the cost base of the property, which can include capital improvements.

“So if you’ve invested money into the property it will affect capital gains,” she said. “If the property has gone up in value, 50% of that is taxable, except when you transfer assets to a spouse, or if you use a principle residence exemption.”

Many people use the principle residence exemption for their urban home, and are not aware that the same exemption cannot be extended to their vacation property. Van Cauwenberghe says property owners need to account for that possible gain if they plan on passing the property on to family.

Thursday, CREW brings you part two in our series on the hidden costs of cottage investments.

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