# Passing Deed For Cottage On To Children



## bariutt (Feb 2, 2013)

Is there any way to avoid or lessen paying capital gains on a cottage that you plan to pass on to your children in your will?

What happens if I put each of their names on the deed now while my wife and I are still alive?

My friend did this a few years ago and says he didn't pay any capital gains when he did this.


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## MoneyGal (Apr 24, 2009)

Yeah, he did it sometime before February 22, 1994; which is when the general capital gains exemption of $100,000 was eliminated for individual tax filers (not small business owners)


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## Four Pillars (Apr 5, 2009)

Or he didn't have any capital gains when he did it. A new cottage perhaps?

Or perhaps he just thinks he didn't pay any capital gains and in fact he did or the CRA will be sending him a letter at some point.


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## bariutt (Feb 2, 2013)

No he had his children's names put on the deed of an older cottage that has appreciated considerably in value. He used a lawyer and completed all of the paperwork. No taxes capital gains were paid. Do you think when the gentleman does die that the tax man will catch up with him when the estate is settled?

He says the way the deed reads is that if one person on the will dies then the property is owned by the other names on the deed.


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## Four Pillars (Apr 5, 2009)

I don't know the process around how CRA would know when a disposition of property happens if it's not sold (ie just added people to the deed). Maybe they can't find out and will only find out when he dies (as you say) or if the cottage is sold?

Regardless, it's not the right way to do it - so I wouldn't look to emulate what he appears to have done.


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## Just a Guy (Mar 27, 2012)

You can get a term life insurance policy which would cover the capital gains.


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## bariutt (Feb 2, 2013)

I recognize that this is not the right way to do this. I do not even own a cottage so my post does not apply to me. 

I am just trying to figure out how or even if CRA gets notified when names are added to the deed. If dishonest people can just add their children's names to the deeds while they are still alive and pay no capital gains taxes and then others who leave the cottage to their children in their wills pay full capital gains - this does not seem like a good system to me.

Large sums of money are involved here. Cottages can sell for $300,000 - $500,000 where I live.


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## Just a Guy (Mar 27, 2012)

Remember, with CRA, the burden of proof is on you, not them. If they investigate you, you need to prove them wrong. When a person was added to the title is on record with land titles. If they were added after capital gains had been incurred, then someone is liable I'd CRA investigates. Of course, CRA doesn't investigate everyone, so people get away with things they shouldn't...but that doesn't make it legal.

Also remember that CRA has years to decide to review things...


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## hystat (Jun 18, 2010)

I have heard the life insurance thing is fairly common. The kids pay the premiums and get a cottage in return.


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## P_I (Dec 2, 2011)

Tim Cestnick periodically writes about the topic in the G&M. For example, Seven smart ways to keep the cottage in the family was the column he wrote in June 2012. The OP (and interested others) might want to Google https://www.google.ca/search?q=cottage+tim+cestnick


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## praire_guy (Sep 8, 2011)

bariutt said:


> I recognize that this is not the right way to do this. I do not even own a cottage so my post does not apply to me.
> 
> I am just trying to figure out how or even if CRA gets notified when names are added to the deed. If dishonest people can just add their children's names to the deeds while they are still alive and pay no capital gains taxes and then others who leave the cottage to their children in their wills pay full capital gains - this does not seem like a good system to me.
> 
> Large sums of money are involved here. Cottages can sell for $300,000 - $500,000 where I live.


Maybe when people post on Internet forums CRA is lurking?


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## OptsyEagle (Nov 29, 2009)

Do you really want your children's ex spouses to own your cottage? Very generous of you.

You definitely want to give this some more thought.


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## sags (May 15, 2010)

SInce the OP posted that his friend had a lawyer involved, I think it could be assumed that some kind of trust or joint ownership was entered into.

My understanding is that if the cottage is sold or gifted, the capital gains must be reported and paid immediately.

However, there are ways to eliminate or defer the capital gains on the cottage.........such as claiming the cottage as a principal residence, forming a trust or partnership, or leaving the owners name on the title and adding the others as joint survivors.

The capital gains must and will be paid eventually. When the original owner passes away, the estate will have to provide information on all assets and the CRA will do a thorough search of the title history and taxes paid, before issuing a final tax clearance certificate.

Without knowing what the specific structure was..........there is no concrete way to answer the question, except to say...........

The taxes due will be paid.........sooner or later. There is no easy way around it.........or everyone would be doing it.


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## hystat (Jun 18, 2010)

another strategy to keep in the family I have heard is to gift to grandchildren, rather than children to skip a generation of tax.


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## OhGreatGuru (May 24, 2009)

If his lawyer prepared a side agreement to the effect that adding the children to title was for estate planning purposes only, and did not convey beneficial ownership, then it's possible the capital gain will not be due until his death; at which time his estate will have to pay capital gains on the FMV at that time. 

If he does not have such an agreement, then he may have committed tax fraud by not declaring a deemed disposition at the time he changed title. If/when CRA finds out about it they will go after either him (if alive); his estate (if it hasn't been closed); or his children. If any of his children decide to sell their share, how are they going to explain their acquisition cost of zero to CRA?


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## bariutt (Feb 2, 2013)

In the case that I described where the children's names were added to the deed while the parents are still alive - what is the mechanism for reporting capital gains to CRA?

Would the lawyer normally declare the disposition and send some type of notice to CRA?

Is the process just left to each individual child to report the disposition at year end when they prepare their tax return?

Does anyone on this forum know or have gone through a process like this? If so how did you report the capital gain on the disposition to CRA?


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## Four Pillars (Apr 5, 2009)

Why are you so concerned about this? You say you don't have a cottage, but you mentioned "What happens if I put each of their names on the deed now while my wife and I are still alive?".

Call the CRA and/or a lawyer and stop wasting time in here.


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## bariutt (Feb 2, 2013)

Four Pillars - Maybe you should become a moderator here. If you are not interested in the discussion then please move on. No one is forcing you to read this post.

Please do not presume that you have the authority to tell me what I can and cannot discuss on this forum.


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## Just a Guy (Mar 27, 2012)

bariutt said:


> In the case that I described where the children's names were added to the deed while the parents are still alive - what is the mechanism for reporting capital gains to CRA?
> 
> Would the lawyer normally declare the disposition and send some type of notice to CRA?
> 
> ...


The children don't claim anything, it is you and your wife who must declare the capital gains as it is you who realized it.

I think you could get away with something like this....

Let's say you bought a property for $100,000. Years later, you decide to add your kids to the title. At that point it would be wise to get some form of appraisal on the property. I don't think it has to be formal, I think a letter from a licensed realtor would suffice. Let's say the property is now worth $200,000. If you add two children to the property, you should probably declare the percentage of ownership they have (let's say 50%). In that case, for the tax year that you add them to the title, you need to declare a $50,000 capital gain on your personal taxes.

Now, I'm not an accountant, but there may be a way to minimize taxes by transferring title over a number of years...capital gains are only taxed at 50%. So in the above example, your income would only have increased by $25,000 which could be split between you and your wife $12,500 each...which becomes fairly minimal as a tax blow. 

However, if you only sold them 10% ownership per year, (assuming the property doesn't increase in value) you would only realize a $2,500 taxable gain each year...not sure if that is legal, but I don't see why not...talk to an accountant.


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## MoneyGal (Apr 24, 2009)

Just a Guy said:


> Now, I'm not an accountant, but there may be a way to minimize taxes by transferring title over a number of years...


http://www.taxtips.ca/filing/capgainresother.htm


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## bariutt (Feb 2, 2013)

Thank you very much MoneyGal - great explanation. I am researching this for some friends who own cottages and are getting on in age, This has been a discussion in our "coffee group" for a while now. I know that there is a lot of knowledge on this forum. I would like to thank every one for their input.I have some good leads to research more now on my own.


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## sags (May 15, 2010)

If the cottage is worth $200,000 and the value deemed sold to the kids was $50,000, wouldn't the estate have to pay capital gains on the remaining $150,000 upon the original owner's death?

It sounds like the ideas are getting off into the weeds a little bit.........and not considering all the possible ramifications.

It would be wise to seek professional guidance from an accountant who deals primarily with estate planning.


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## OhGreatGuru (May 24, 2009)

To start with, you are taxed on capital gains, not proceeds of sale. So your hypothetical case is mixing things.

In the absence of some legally defensible arrangement dictating otherwise, if you add people to title all are presumed to have an equal share of the property from a tax point of view. So, if 2 kids are added to title, the parents are deemed to have sold a 50% share at the then FMV at the time of title change. Parents have to report whatever their deemed capital gain was on 50% of the property. There are schemes to avoid this, but this is the general rule. (Of course if they removed themselves from title, and gifted entire ownership to the kids, it would be 100%.) After the parents die, the estate of the last surviving parent pays capital gains on their remaining half interest in the property. This would be based on half their original purchase cost, and half the FMV for the cottage at the time of death. The children would "acquire" their parents' shares at the FMV at time of death, which changes their total adjusted cost base.

In your example, the parents' remaining share of the property is only 50%, so the estate's proceeds from deemed disposition when they die would be half of $200,000, or $100,00. The estate's capital gain would be $100,00 less half the original cost of the cottage.


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## OptsyEagle (Nov 29, 2009)

sags said:


> If the cottage is worth $200,000 and the value deemed sold to the kids was $50,000, wouldn't the estate have to pay capital gains on the remaining $150,000 upon the original owner's death?


No.

Since this is a non-arms length transaction CRA has a significant penalty for people who try to scam the system. If the cottage is worth $200,000 and the parents give it to their children and deem the value to be $50,000, here is what they do.

If CRA finds out that the FMV of the property was $200,000, they immediately adjust the capital gains tax that the parents owe with interest. They are not done yet. They then fix the ACB for the children at the deemed value, $50,000. So when the children sell the cottage they will pay tax on $150,000 gain, again. So these people will be double taxed as a penalty for misconduct and as an incentive to be honest.


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