How to transfer cottage ownership and reduce the tax bite

How to transfer cottage ownership and reduce the tax bite

Excerpted article written by Tim Cestnick, The Globe and Mail

If you’re visiting a friend’s cottage this summer, here are a few tips that will be sure to create lasting memories for everyone: Bring four very large suitcases (store one in each bedroom if necessary), bring at least two dogs (those with digestive problems are best), start a fire (preferably outside the cottage, and big enough to burn a picnic table), roast marshmallows (bring those mini ones with toothpicks and see who can stand the heat) and scare the kids (ghost stories to give them nightmares for three days can add to the fun).

Today, I want to talk about steps you can take to reduce the tax bill on the eventual transfer of the cottage. Consider the following ideas:

1. Use the principal residence exemption.

A gift or sale of the cottage will be treated as a disposition at fair market value. It may be possible to use your principal residence exemption (PRE) to shelter a gain from tax, whether during your lifetime or upon death. The PRE can only be used to fully shelter one property from tax if you own more than one at the same time. Be sure to visit a tax pro to determine whether you’re able, and whether it makes sense, to use the PRE on the cottage.

2. Maximize your adjusted cost base.

Keep track of all major repairs and improvements to your cottage over the years. You may be able to use these amounts to increase your adjusted cost base (ACB) of the property. A higher ACB will mean a lower capital gain, and lower taxes on the transfer of the cottage.

3. Leave it to your spouse.

If your plan is to transfer or sell the cottage after your death, consider leaving the property to your surviving spouse. This can defer the tax, if any, until the date of your spouse’s death.

4. Make a transfer today.

If you want to make a transfer during your lifetime, consider doing it today. This will move the future growth – and future tax bill on that growth – into the hands of your heirs, deferring the tax for years. You’ll still be deemed to have sold the property at fair market value today when making the transfer, but there might be little tax to pay if the property hasn’t appreciated much. You can maintain control and use of the property even after a transfer using a trust or an agreement with your heirs.

5. Claim a capital gains reserve.

If you want to gift the cottage to your kids during your lifetime, try this idea: Rather than gifting the property, sell it to the kids at fair market value and have them pay you using promissory notes. You don’t have to collect on the notes if your intention is to make this a gift; rather, you can forgive the notes upon death without tax implications. If you structure the notes properly, the tax on the “sale” can be paid over a five-year period of time rather than all in one year, using what’s known as the “capital gains reserve.” If you simply make a gift, and taxes are owing, you’ll have to pay that entire tax bill in the year of the gift.

6. Claim capital losses to offset a gain.

If you have other assets, perhaps investments, that have dropped in value, consider selling those assets to realize the capital losses. These losses can be applied to offset any taxable capital gain on the transfer of the cottage.

7. Buy life insurance to cover the taxes.

While this idea won’t eliminate the tax bill upon death, it can provide needed cash to pay those taxes where the plan is to keep the cottage in the family and not sell it after you’re gone. You might also consider buying enough insurance to help fund all or part of the annual maintenance costs for your heirs. Life insurance may allow you to fund the tax bill using just pennies on the dollar.

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Tax tips for Canadian snowbirds

Tax tips for Canadian snowbirds

BY TERRY MCBRIDE,  The Star Phoenix 

Are you a Canadian snowbird, back home in Canada after a winter stay in Arizona? If you want to avoid having to file a U.S. tax return, you should tell the Internal Revenue Service (I.R.S.) that you are not a U.S. resident.

Form 8840 is due June 15.

If you consistently stay 122 days or more in the United States each year, the I.R.S. expects you to file a U.S. tax return to report your worldwide income. The 122 days happens to be the four months from the end of November to the beginning of April.

The I.R.S. formula counts all the days you stayed in the U.S. in 2014, plus one-third of the days in the U.S. in 2013 plus one-sixth of the days in the U.S. in 2012. When you do the math, stays of 122 days per year make you “substantially present” in the U.S. for 183 days, which is enough for you to become a U.S. resident for tax purposes. Don’t wait to be asked to file a US tax return. Be proactive. Declare each year that you have a closer connection to Canada. Obtain form 8840 from either the I.R.S. website or the Canadian Snowbird Association website.

Form 8840 asks for your passport number and the type of U.S. visa you have. Typically a snowbird has a B-2 visa, meaning the purpose of the trip was recreational in nature, including tourism, vacation, amusement, or visits with friends or relatives.

If you do not mail form 8840 to Austin, Texas each year, you could be asked to file a U.S. income tax return. Even if you are positive that you would not owe any U.S. tax because of the Canada-U. S. tax treaty and Canada’s higher tax rates, the I.R.S. can still charge hefty penalties for neglecting to report your income to the I.R.S. Canada and the U.S. share information. Your date of entry into Canada tells the I.R.S. when you left the U.S. Don’t risk the penalties. File your 8840 form by June 15. Each spouse must file a separate 8840 form. Make a photocopy of your 8840 forms to carry with you the next time you cross the border.

Questions about residency Canadian financial institutions are now compelled to report all the personal information of any U.S. persons holding accounts with them. That means your bank or investment broker must ask you if you have a connection to the U.S. You do have a connection if you spend four months each winter in the Southern U.S. Your bank would have to report your personal information to the I.R.S. Bringing a photocopy of your 8840 form helps you prove to your Canadian bank that you are not a U.S. resident for tax purposes.

U.S. rental property The Canadian income tax return asks the question, “Did you own or hold foreign property at any time in the year with a total cost of more than CAN$100,000?” If the answer is “Yes,” then you need to complete Foreign Income Verification Form T1135 and file it with your income tax return by April 30. If you file your tax return electronically, you can now also file your form T1135 electronically, for the first time.

Snowbirds who own U.S. vacation property purely for personal use and enjoyment can answer “No” to the foreign property question even if its cost does exceed $100,000.

However, if you rent out your U.S. vacation home, you really should seek professional advice about filing a U.S. tax return and completing both the T776 rental schedule and form T1135 with your Canadian tax return.

Terry McBride, a member of Advocis, works with Raymond James Ltd. (RJL). The views of the author do not necessarily reflect those of Raymond James Ltd. (RJL). Information is from sources believed reliable but cannot be guaranteed. This is provided for information only. We recommend that clients seek independent advice from a professional adviser on taxrelated matters. Securities offered through Raymond James Ltd., member of the Canadian Investor Protection Fund. Insurance services offered through Raymond James Financial Planning Ltd., not a member of the Canadian Investor Protection Fund.

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