Our tax code allows you to receive, on a tax free basis, a capital gain made on the sale of your principal residence. In the normal course of events, you are only permitted to receive this tax benefit once a year. If you improve the property while living there (and are not in the renovation business), there may be an opportunity to obtain a larger tax free windfall because of your sweat equity. Should you later acquire another principal residence, a further tax free gain could be available.
The Family Cottage
But what about the family cottage? Because it is not your principal residence, if it is sold or left as a bequest at death, even if you are passing it on to your children, it must be appraised and tax paid on the capital gain. To avoid or reduce this tax, consideration should be given to setting up a simple corporation now while your cottage can still be valued at a reasonable amount and giving your children shares in the company. This is a relatively straightforward and cost effective way to avoid or reduce taxes. As an additional benefit, it will likely avoid a family fight on your passing.
The foregoing provides only an overview and does not constitute legal advice. You are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained in the context of your own particular circumstances.
