The chalet holds a special place in the hearts of Quebecers. The perfect place for family reunions. It’s only natural that you’ll want to pass it on to your children so they can carry on the tradition. Yes, but at what price?
Even if you want to preserve the chalet and pass it on to future generations, it is important to predict the tax implications of the sale or transfer to avoid any unpleasant surprises.
Tax bill
You should be aware that significant tax may apply at the time of transmission. “In fact, the tax authorities assume that the chalet will be sold at market value. The difference between this value and the price paid for the acquisition, from which we deduct the costs of renovations and work carried out over time, constitutes a capital gain on which the tax applies,” explains Kevin Quach, Vice President. President, Business Succession Advisory, TD Wealth Management. The bill can be significant, especially at a time of rising prices in the real estate sector.
Be careful, warns Kevin Quach, because the tax also applies if it is a transfer, i.e. a gift, between related people, for example from a parent to a child.
Who pays the tax bill? The person who gifted the chalet, as he is considered to have made a capital gain even if he gave the property to his child.
If the chalet is left to a close person by will, the estate must pay the tax. The same rules apply to determining the capital gain as to the transfer.
knowing liberation
However, it is possible to claim an exemption for the main residence. This means that no tax is payable for the period that the chalet was your main residence. This exemption can be partial, meaning it can only apply to certain years. Of course, you cannot apply for this exemption twice for two different residences in the same period.
Pay taxes now
Kevin Quach points out that with property values rising, the sooner the vacation home is transferred, the less likely the capital gain is. “By transferring and paying the tax immediately, it is possible to “freeze” the value of the chalet,” he says.
If you would prefer to leave the chalet to your heirs after your death, you can better cushion the financial and tax consequences by taking out life insurance. The amount paid by the insurance in the event of death covers the costs associated with the transfer of the chalet to your heirs. However, this requires good estate planning in advance.
Exception for spouses
An exception applies if you transfer the chalet to your spouse in your will or during your lifetime. “The tax liability is then deferred until the death of the spouse who received the chalet,” mentions Kevin Quach. In this case, it is the estate’s responsibility to pay the tax.
ADVICE:
- Are you planning to circumvent the law and sell the chalet to your child for a symbolic amount or well below market value? Be aware that the tax authorities will not be fooled! “Selling below market value can lead to double taxation,” warns Kevin Quach.
- For example, if the value is $250,000 and you sell for $150,000, the tax will still apply on the $250,000 amount. Your child also pays the price, because when the chalet is transferred, his taxable profit will be higher because the price paid at the time did not correspond to reality. For this reason, when selling to a related party, it is best to price appropriately. A certified appraiser can help you with the investigation.
- Don’t forget to keep the invoices for all the work and renovations you have carried out in your chalet. This reduces the capital gain that is taxable when the property is transferred.