These tips will ensure clients share as little as possible with the CRA.
1. Claim the exemption of the biggest gain
If your client lives in a recreational property part of the year, he can claim the principal residence exemption on that property. He may even be able to claim the exemption on a property outside of Canada.
But there’s a catch: he can only claim the exemption on one residence at a time.
2. Keep track of capital costs
A capital cost means it’s for a lasting improvement to the original condition of the property (e.g. adding carpet to a floor that was originally hardwood). If the expense represents something that is used up or is replacing something that was used up, it isn’t a capital cost (e.g. replacing carpet that was already there).
If clients keep track of capital expenses, they’ll know whether to claim the exemption on their homes or second properties. Make sure they keep these receipts for at least three years after selling the property. Suggest they keep a folder labelled ‘home capital costs’ for these receipts.
3. Plan carefully
Don’t put an adult child on the title of a residence purchased for him to live in while he attends school. Unless the house is gifted to the child, he or she can’t claim the capital gains exemption.
Also, putting a child’s name on the title of a property can expose the property to creditors of the child (like ex-spouses). And don’t add an adult child to a title to avoid probate tax on death. You may end up triggering capital gains, setting the stage for an estate dispute, or exposing the property to creditors.
Tax tips for recreational properties
Yens Pedersen is a lawyer in Miller Thomson LLP’s Regina office specializing in estate planning, wills and tax audits. He was a contributor to the recently released Miller Thomson on Estate Planning.