You could consider changing ownership from “tenants in common” to “joint tenants” if you both wanted the property to go to each other on death, although your son may have other beneficiaries, like a spouse or his children, who he wants his share to go to instead. Joint tenancy may help you reduce the costs to settle your estate and expedite things on your death as well.
When a taxpayer has more than one property, like owning both a house and a cottage, only one can be designated as her or his principal residence in a given year. When you sell a property—or when you’re deemed to have sold it, on your death—that’s the point at which you make a designation whether some or all years of ownership are tax-free as a principal residence.
People’s homes tend to be more valuable than their cottages, in which case the cottage capital gain is often treated as a taxable capital gain, with a home being their tax-free principal residence.
What is the lifetime capital gains exemption? Does it still exist?
There are other considerations if you owned the cottage prior to February 1994. A $100,000 lifetime capital gains exemption existed until that time, and you may have claimed a deemed capital gain to bump up your cottage adjusted cost base. And if you owned prior to 1972, there was no capital gains tax until January 1, 1972m so some of your cottage capital gain may be exempt from tax.
Assuming you and your son, Phylis, will have capital gains tax to pay on the cottage, the construction, capital improvements, and renovations you did may reduce the future tax payable by increasing the cost base and reducing the capital gain. It’s important to keep proper records to support a claim. It’s also important to note: If you did any work yourself on a cottage, you can’t put a value on your labour—you can only add labour paid to a third party to the cost base for capital gains tax purposes.
There’s another important point with respect to the excavator, skidster and barge. You can generally only capitalize the cost of materials for a do-it-yourself cottage build. Equipment you purchased has a value after the construction is done and can be sold or used for other purposes. The cost of equipment you rent or lease during construction may be an eligible capital cost and added to your adjusted cost base.
There are a few other considerations, Phylis. Assuming the property was beneficially half yours, and that you and your son contributed equally to the purchase and construction, you would have a capital gain on your death. That is, as long as the cottage wasn’t considered your principal residence. If you were just on the property so your son could qualify for a mortgage and it was beneficially his, you may not have to claim a capital gain. The value and the potential tax implications may be his alone in this case.
Another consideration is whether there would be enough liquidity in your estate to pay the capital gains tax. If you have other children or other beneficiaries, just make sure you take into account how much tax will be payable on the cottage and what that means for the remaining net estate value to be divvied up amongst others, if applicable.
