Keeping It in the Family: Tax Considerations for Transferring a Recreational Property

For many B.C. families, a recreational property is more than an investment. A cabin on the lake, a ski property, or a place the family has returned to every summer can carry decades of memories along with a significant financial value. Eventually, though, someone has to decide what happens to it next.

You may want to give the property to your children while you’re alive, add them to the title, sell it to them for a nominal amount, or simply leave it to them in your will. Those options can look similar from a family perspective, but they can produce very different tax and estate-planning consequences.

The important thing to know is that keeping the property in the family doesn’t necessarily mean the transfer is tax-free.

A gift can still trigger a tax bill

If you give a recreational property to an adult child, the CRA generally treats you as though you sold the property for its fair market value at the time of the gift. If that value is higher than your adjusted cost base, the transfer can trigger a capital gain even though no money has changed hands.

Consider a simplified example: Suppose you purchased a recreational property years ago for $250,000 and subsequently made $50,000 of qualifying capital improvements, giving you an adjusted cost base of $300,000. Today, the property is worth $1.2 million.

If you give it to your adult child, you could be considered to have disposed of it for $1.2 million, resulting in a $900,000 capital gain before considering any available exemptions or other adjustments. Under the current one-half capital gains inclusion rate, $450,000 would be included in taxable income. The actual tax owing would depend on your other income and circumstances.

That can create an obvious cash-flow problem: you may have a sizeable tax bill without receiving any sale proceeds to help pay it.

Keeping good records also matters. Legal and acquisition costs and qualifying capital improvements can generally form part of the adjusted cost base, while ordinary repairs and maintenance generally cannot.

Selling it for $1 isn’t a shortcut

A common instinct is to transfer the property to a child for a token amount rather than give it away. Unfortunately, selling a property to a family member for less than fair market value can create an especially unfavourable result.

For tax purposes, the parent may still be treated as having sold the property at fair market value. At the same time, the child’s cost base may be limited to what they actually paid, potentially exposing some of the same appreciation to tax again when the child eventually sells the property.

In other words, the sale price written on the transfer documents isn’t necessarily the value CRA will use to calculate the parent’s gain.

Could the principal residence exemption help?

Possibly.

A recreational property doesn’t have to be your primary home to potentially qualify as a principal residence for income tax purposes. A property may qualify for a particular year if you or certain members of your family ordinarily inhabited it during that year and the other requirements are met.

The complication arises when you also own your regular home. Generally, only one property can be designated as the family’s principal residence for a particular year. If both your home and recreational property have increased significantly in value, deciding which property to designate, and for which years, can require some analysis.

This is one reason the original purchase price, dates of ownership, improvement costs, and current fair market value of both properties can become important long before a transfer actually happens.

Transfer it now or leave it through your estate?

Waiting until death doesn’t make the accrued gain disappear. If a recreational property passes to a child or another beneficiary, the owner is generally deemed to have disposed of it at fair market value immediately before death. Any resulting capital gain is reported on the deceased’s final tax return. A transfer to a surviving spouse or common-law partner may instead qualify for a tax-deferred rollover, although that generally postpones the tax rather than eliminating it.

You don’t have to transfer the entire property at once. One option is to transfer a partial interest by adding another owner. How that ownership is structured matters: with joint ownership and a right of survivorship, your interest would generally pass directly to the surviving owner when you die. If the property is owned as tenants in common, however, your share would generally remain part of your estate and be distributed according to your will.

A sale may offer another option. If the property is sold at fair market value and the purchase price is paid over several years, a capital gains reserve may, in some circumstances, allow the seller to spread the gain over as many as five years. The right approach will depend on more than the immediate tax consequences, including your cash-flow needs, estate plan, and how much ownership or control you want to retain.

B.C. property transfer tax deserves a closer look

Income tax isn’t the only consideration for a B.C. property; a change in registered ownership can also trigger B.C. property transfer tax (PTT). There is a specific exemption for certain recreational residences transferred between related individuals, but its requirements are quite restrictive.

Among other conditions, the property must generally have a fair market value of $275,000 or less, be no larger than five hectares, be classified as residential, and have been used seasonally for recreational purposes. The recipient must also meet the applicable relationship and residency requirements.

That $275,000 limit means many B.C. recreational properties won’t qualify. For example, if a $1.2 million property were fully subject to the general PTT rates, the tax would be approximately $22,000: 1% on the first $200,000 and 2% on the next $1 million. That’s worth identifying before anyone changes the title.

Make sure the family wants the plan, too

Tax planning can help determine how to transfer the property. It can’t answer whether transferring it is actually the right family decision.

Before making a change, it’s worth discussing questions such as:

• Do the children actually want to own the property?
• If there are multiple owners, how will use, maintenance, repairs, and property taxes be divided?
• What happens if one family member eventually wants out?
• If one child receives the property, how will that affect the rest of the estate?
• Is the current owner comfortable giving up control now?
• If you decide not to transfer the property now, what steps can you take to ensure it passes to your intended beneficiaries according to your will when you pass away?
• Are there ways to reduce or avoid property transfer tax and probate fees when the property is transferred after your death?

Those conversations can be just as important as calculating the capital gain.

Plan before you transfer

There isn’t one best way to keep a recreational property in the family. Giving it away now, selling it to the next generation, retaining it until death, or transferring it first to a spouse can each have different tax, cash-flow, legal, and estate-planning consequences. What matters most is working through those consequences before signing over the property.

If keeping a recreational property in your family is part of your longer-term estate plan, talk to your DMCL advisor. They can help you understand the tax implications, model your options, and work with your legal advisors to plan a transfer that fits with the rest of your estate.