This morning I read an interesting article in The Star - Property investment is how this mom is providing for her kids’ future. Against the recommendations of two financial advisers, Jennifer Johnson has purchased two rental houses for her children. I sincerely hope there is misreporting in Jennifer's understanding of the tax implications of the capital gains she has made.
The article states, there are massive capital Gains Taxes on the appreciation of the properties - However, it also says there is no tax payable on this if she keeps the properties in her name, and passes them to the children as inheritances. This is incorrect. While the children won't pay capital gains tax - her estate will. If the estate doesn't have the cash to pay the capital gains tax, one or both of the properties may need to be sold to cover it. By holding the properties until her death, she will lose the option of staggering the gains over two (or possibly more) years. If the properties don't appreciate anymore between now and her death, her capital gain of $500,000 will give her a taxable income of $250,000 on her final tax return. The tax will need to be paid by the funds in her estate. This will put her in the whopping 53.53% Ontario marginal tax rate. Assuming that she has no other income that year, the taxes triggered will come to almost $100,000. Selling the properties over two years could save her about $25,000. Since all of her assets will be deemed sold upon her death, everything else that she has that is taxable that year, will be taxed at 53.53%. This includes her CPP, OAS and all the funds she has in her RRSP/RRIF. Her final tax return could well be ugly.
When Jennifer dies, if the children are living in these homes with their families, they will either need to come up with the cash to pay the taxes or sell the homes they live in to cover it. If the properties appreciate once the kids are adults and have moved in, the family will have lost the opportunity to have three properties covered by the principal residence tax exemption. Jennifer will be the owner of all three properties and can claim any of them since they are occupied by either her or her children - but she can only claim one. Her children's principal residence exemptions will go unused since they don't own residences.
Jennifer should also be careful not to "sell" the homes for a nominal value to the children. Selling the properties to adult children for below market value can result in double taxation. Gifting them to minor children will trigger capital gains tax as well as end up with the gains still taxable to Jennifer until they are of age. It's all a bit of a minefield - one misstep and it's TAX-TIME!
Math is hard. Taxes are harder! Unless you are a tax expert (and even if you are!), whatever workaround you have come up with to completely avoid taxes, has likely been thought of by the CRA. Not only have they thought of it, but they have come up with a way of thwarting it - possibly in a punitive manner!
While she may have done very well with her investments, she hasn't done as well as she appears to think. I hope she doesn't have all her eggs in this one basket. A little bit of knowledge is a dangerous thing. Get thee to a tax expert Jennifer!
Christine Williston is a Money Coach with Money Coaches Canada. She can be contacted Here. Christine works with business owners, families, and individuals to help them make wise financial decisions. She is available to work with private clients as well as speaking events