Family cottages and the impact the capital gains tax changes could have

With the increase in the capital gains inclusion rate moving forward, Canadians with family cottages are facing a larger tax bill when they pass them on to family or sell for retirement.

Real estate experts say it’s not just the wealthy being caught in the crossfire.

“I know the federal government has been vocal about this is only targeting the wealthiest of the wealthy; it’s just not in practicality, it’s just not true,” says Christopher Alexander, president of Re/Max Canada.

“I think that it’s going to penalize more average Canadians than were intended.”

The House of Commons voted Tuesday to approve the Liberal government’s capital gains tax changes. The Conservatives opposed the measure.

Capital gains are the proceeds from the sale of an asset like a stock or an investment property. Currently, all capital gains come with an inclusion rate of 50 per cent, meaning half of the profits realized from the sale are added to taxable income in that year.

Under the Liberals’ proposed changes, that inclusion rate would rise to 67 per cent on any gains realized above $250,000 annually for individuals.

They say this measure targets the wealthy and will be invested in health care, housing, and clean technology and will improve “tax fairness” in Canada, but not everyone agrees, saying it’s penalizing more of those in the middle class and people looking to retire.

Bob Clarke, owner of Clarke Muskoka Realty and Construction, says since it was announced they have been incredibly busy with people trying to finalize the sale of their cottages before the change comes into effect at the end of this month.

“We’re running out of time. In fact, we’ve sold I don’t know how many properties now, in this legislation and people aren’t saying, ‘Let’s close it on June 25th.’ They’re saying, ‘Let’s close on the 20th or the 21st,’ because of potential hiccups and issues that we have at real estate closings,” Clarke says.

He says lawyers working to finalize deals are also feeling the crunch, noting that at least two he works with can’t take on any clients ahead of the change.

“What it’s done is it’s pushed people to make a decision and to put their cottages up and secondary homes on the market because they are going to be impacted by the capital gain,” he says.

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Clarke and Alexander say more time should have been given for people to get their plans in order or cancelled altogether.

“The perception is that everybody up here is wealthy, but you have to understand there are people whose parents have bought these properties and the kids are teachers or they’re in good paying jobs like firefighters, things like that,” Clarke says. “But we had properties increase in value from 2019 to the peak of COVID by 50 to 60 per cent and our correction has been in the 10 per cent range.”

What this means for family cottages is that when the owner of the cottage dies or passes it on to family,  high amount of the increased value is subject to capital gains tax before the property can be passed on, which can be a hefty increase for homes passed through families for generations.

“The people that were planning on selling this year after June 25 as part of their retirement strategy or wealth-building strategy, those are the people that are going to suffer first,” Alexander says. “I think the vast majority of people that own investment properties are everyday Canadians that save up enough to buy a second property that they use to generate income for either their retirement or for their kids’ education. Those are the people this is going to really hurt the most, in my opinion.”

According to a recent Leger survey commissioned by Re/Max, 13 per cent of Canadians own a recreational home. This includes six per cent who purchased before 2020, three per cent who bought after 2020 and three per cent who inherited a cottage.

The survey found that 28 per cent of Canadian cottage owners had already sold one of their properties amid the elevated cost of living and rising interest rates.

Alexander says while he has not seen a flood of cottages hit the market, he has seen it accelerate a lot of families’ succession planning, looking at how the change impacts them passing on the property to the next generation.

But before making any decisions, Alexander recommends consulting an expert first.

“If you’re thinking of selling your home or your cottage as a result of this, there are new tax measures, speak to a good real estate lawyer, good accountant, and obviously a professional Realtor because they can help guide you through the process.”

— with files from Global News’ Craig Lord and Uday Rana