It’s a lifelong dream… the kids have grown up, left the nest, and after decades of work you’re finally ready to retire. You’ve earned your place in the sun, and you’re thinking of giving up the hectic city life to live full-time at the cottage.
“Canada’s Income Tax Act allows us to claim one dwelling as a principal residence per-family-unit,” says Chartered Accountant Philip Maguire, a principal in Glenidan Consultancy Ltd. in Toronto. “You must ordinarily inhabit the residence each year for it to qualify as a principal residence. But if you’re selling the house – or cottage, condo, mobile home or even a houseboat – you must designate one specific property to be your principal residence. Think this over carefully, because the money from the sale of all other properties will be subject to capital gains.”
Capital gains tax applies to the difference between what you originally paid for the house and its value at the time you sell it (special rules apply if the house was bought before 1972). If you’ve owned the home for some time, its value may have increased substantially. A full 50 per cent of that increase can be taxable.
There is a silver lining in that dark cloud. “If part of that increase in value is due to improvements you’ve made, the cost-base amount used to calculate the capital gains can be increased. The capital gains amount then decreases,” explains Chartered Accountant John AbedRabbo of Polyzotis & Co. LLP in Toronto. “But those improvements must be real upgrades, not just normal maintenance. Keep receipts to back up your claims.”
There’s an added bonus for upgrading a home in 2009. The 2009 Federal budget introduced the home renovation tax credit (HRTC): up to $1,350 for eligible expenditures between $1,000 and $10,000. The credit can apply to either the cottage or the house in town.
Beyond tax issues, there’s a lot to consider if you’re thinking of making the cottage your permanent home. “It really boils down to a personal decision,” says Maguire, “and you should consider both your lifestyle and your needs as you get older.”
“Living at the cottage might seem like being on a permanent vacation, but consider the convenience factor, too,” says AbedRabbo. “Is it easily accessible in winter time? Can you live there safely and comfortably? Are you able to find service people to repair the furnace or plow your private access road?”
Seniors especially should consider some of the health-related issues of living at the cottage. What about emergency services and the distance to the nearest hospital? Will you be able to find a family doctor in the area, and get medication or treatment if and when you need it?
An impulsive decision can be costly, so be sure to carefully weigh your options. Talk to a Chartered Accountant about your specific residential situation, the tax implications and your future financial plans.
The Institute of Chartered Accountants of Ontario is the qualifying and regulatory body of Ontario’s 33,000 Chartered Accountants and 5,000 CA students. Since 1879, the Institute has protected the public interest through the CA profession’s high standards of qualification and the enforcement of its rules of professional conduct. The Institute works in partnership with the other provincial Institutes of Chartered Accountants and the Canadian Institute of Chartered Accountants to provide national standards and programs that are used as examples around the world. </em>
