Q&A: Cottage woes

Zoomer | September 29th, 2008

Question: My mother inherited her parents’ cottage several years ago. The cottage has been in the family since 1950 when it was bought for a very low price. The cottage has been gutted and rebuilt in the 1990s so is now worth considerably more than it was at time of purchase. Since my parents have moved to the other side of Canada, they no longer use the cottage and wanted to sell, but due to capital gains tax, they would receive almost no money for it. Is there any way to reduce the amount owed to capital gains? Or can this only be reduced if it was their primary residence? Any advice would be greatly appreciated. – C.D.

Gordon Pape answers: To begin with, it is not correct to say
your mother would receive almost nothing if she sold the cottage. Half of the
capital gain would be received tax-free. The other half would be taxed at your
mother’s marginal rate. The top marginal rate in Canada is about 48% which means
that the effective tax rate on the total capital gain would be about 24% at
the most.

You say the cottage was gutted and rebuilt in the 1990s. That represents a
major renovation, the cost of which can be deducted before the taxable capital
gain is calculated. An accountant or tax lawyer can do the paperwork for you.

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