Cottage Q&A: Inheriting the cottage and capital gains

The word TAX spelled out in wooden cubes, stacked on coins By A-photographyy/Shutterstock

My brother and I were given title to the family cottage as an early inheritance from our elderly father in 2020. The cottage was built in 1990. Our father chose to designate it as his principal residence as of 1994 and paid the capital gains for the period between 1990 and 1994 in his 2020 tax return. If and when my brother and I ever choose to sell the cottage, which had an MPAC assessed value of $550,000 in 2020, would the starting value for the capital gain be based on that $550,000 amount, or on the 1994 value of $135,000 that our father used in his 2020 tax return?—Harry V., Catchacoma Lake, Ont.  

Neither value. The starting value for the tax calculation if and when you sell it will be the cottage’s “fair market value,” determined by the cottage’s sale price. That’s obviously not MPAC’s assessed value, and it’s not the historical FMV from 1994.

Getting an appraisal of the cottage’s value now if you don’t end up selling it for, say, five years, wouldn’t be useful. Market values are fluctuating, says Peter Lillico, a lawyer with Lillico Bazuk Galloway Halka in Peterborough, Ont. “The cost of the appraisal would just be money thrown away.” 

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But it wouldn’t be a waste to calculate the cottage’s adjusted cost base now. (Math equation time! The adjusted cost base = the cost base, a.k.a. the value as of the date of purchase or inheritance + the value of the capital improvements since the date of purchase or inheritance.) To find this number, you’d get a historical appraisal to establish the cottage’s 2020 value—the cost base—and add the money you’ve spent on any capital improvements since acquiring the cottage—a new roof or an expanded dock, for example. 

Then you and your brother “are loaded for bear,” says Lillico. The adjusted cost base is the amount you’d subtract from the sale price when you’re ready to sell in the future.

This article was originally published in the Sept./Oct. issue of Cottage Life.

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