How can you avoid a big capital gains tax bill when you die?

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By Julie Cazzin with Andrew Dobson

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Q: My wife Ava and I are giving money away to our only child, Marlena. I know in Canada I can do it tax free. But what are the implications of adding Marlena’s name to the title on our primary residence, small rental property, and cottage, as well as all of our bank accounts? All three properties were purchased in the 1970s, so there is a hefty capital gains tax to pay when we sell or pass away. We would like to avoid this if possible. Marlena is 60 years old, single and has one child, our grandson Henry. Is this a good way to save on paying capital gains tax? If not, what are some other ways to avoid a big capital gains tax bill when we die? — Henry

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PF responses: There are several factors to consider when determining potential strategies to minimize taxes. First, the principal residence exemption may allow you and Ava to avoid paying capital gains tax on a portion of the real estate appreciation. The principal residence exemption allows a tax-free capital gain on a property you normally inhabit. It doesn’t have to be your primary residence. It can be claimed for your chalet. But since most people’s home is more expensive than their cottage, claiming it on a secondary property is rare.

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A couple can only have one principal residence between them and only one principal residence exemption claim in a given year. Since all three properties were purchased in the 1970s, claiming the exemption on your home will likely make your cottage fully taxable.

Capital gains tax was not introduced in Canada until 1972, so only capital gains from 1972 would be taxable. Previously, there was a cumulative capital gains election of $100,000, and in 1994 many owners of cottages and rental properties increased the adjusted cost base of their properties to use some or all of that exemption. If you did, it could reduce some of the capital gain on your other properties.

The principal residence exemption is claimed when selling a property. If you transfer property to a family member, this is considered a deemed disposition, as if you had sold the property. The same disposition occurs on death when you are deemed to have sold all of your assets. The transfer of property to a family member is done at its fair market value, so you cannot give it away or use an artificially low value to avoid taxes.

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You may be able to get creative and transfer partial ownership each year for a number of years to your daughter to have small capital gains and keep your income in a lower tax bracket. But if you add Marlena to the title of your properties, there could be other issues related to the principal residence exemption.

For example, if you add Marlena to the title of your principal residence today and the value increases until you die, there may be tax payable on the accumulation of her share of the value at from the time it was registered on title until the property is sold.

If you live in a province with high probate fees, co-ownership with your daughter may help avoid some probate fees under your share of assets passed to Marlena by right of survivorship.

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With real estate, there may not be many logistical advantages to owning them jointly. If Marlena is the executor of your estates, she may still be able to enter the home, take inventory of items, and even list the property for sale without owning it. While finalizing the probate process can take several months, she doesn’t necessarily have much more flexibility in inheriting the house through right of survivorship than in being the beneficiary of the will.

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With bank accounts, you may be exposed to several risks if you add Marlena to these accounts. She would have full access to these funds as a joint account holder. Also, just like other assets such as your real estate, if Marlena is sued or enters into a relationship and has a family law dispute, these joint assets could be object of complaints. If you have non-registered investment accounts and add your daughter’s name to them, this could result in a deemed disposition and a capital gain on some of the investments.

Before adding Marlena’s name to any of your assets, please consider that the risks may outweigh the benefits. Talk to your accountant and estate attorney to get their advice. Since your primary motivation seems to be to avoid capital gains tax, adding your daughter’s name to your assets unfortunately won’t achieve that goal.

Andrew Dobson is a Certified Financial Planner (CFP) and Chartered Investment Manager (CIM) fee-only/advice-only at Objective Financial Partners Inc.

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