Is there any way to avoid capital gains tax entirely while handing down the cottage?
Only in Cottage Q&A Dream Land, where there are no weeds in the lake, the basement is never damp, and everybody gets along with their neighbours. In other words, no. But there are ways to reduce it. The capital gains tax will be automatically triggered if the kids are made co-owners of the cottage, if it’s sold or gifted to the kids entirely, or if it’s passed down after you die. Say you’d like to transfer the entire cottage to the kids now. One strategy is to hand over the cottage in stages. For example, 20 per cent each year for five years. The capital gains tax in each year will be less than if the transfer happened all at once.
Another strategy—whether you transfer the cottage now, or through your will—is to designate the cottage as your principal residence, in which case, it’s exempt from the capital gains tax. If your cottage has increased in value more than your house, this may make sense. Of course, you can only designate one property as your principal residence at a time, so you’ll avoid the capital gains tax on the cottage, but not on your house.