Cottage owners are scrambling to close deals before proposed changes to the capital gains tax take effect on June 25th. The new rules would raise the inclusion rate on capital gains greater than $250,000 from 50 percent to 66.7 percent – or two-thirds. If an individual sells a second property such as a cottage after the new rules kick in as expected on June 25, they would pay the higher rate.
As a result, the clock is ticking for those who wish to sell or transfer their vacation homes at the lower capital-gains tax rate. Just over a week after the budget was announced, realtors say they are seeing a flood of clients looking to speed up the selling process.
While it is nearly impossible for individuals to list a property and close the sale before the tax changes, those with cottages already on the market are pushing to move up closing dates, said Barb Williams, a realtor with Baumgartner Realty Group in Haliburton, Ont.
“It’s chaos,” Ms. Williams said, adding that a number of clients have told her the changes have upended their financial plans. “All the people that decided to put their house for sale a month ago and made the decision at the time that this is the year they’re going to sell based on the numbers their accountant gave them, now the rug is pulled [out from] underneath.”
The budget describes the changes as a way to achieve tax fairness by making wealthier Canadians pay more. Finance Canada estimates the changes will affect about 40,000 individuals, but not everyone agrees that this tax change will only affect the wealthiest.
“I think that’s far from what we’re seeing in reality right now. Anybody with a family cottage that they’ve had for decades is being impacted,” said Tyler Da Costa, a realtor at Cottage Vacations Real Estate Brokerage Inc., which deals with cottage properties in Ontario, including in the Muskoka, Parry Sound, Haliburton, Simcoe and Kawarthas regions.
“Many of these properties that have been around for three, four or five decades in the family, and have been passed on to the next generation, they have a very, very minimal cost basis, and most of these assets are worth a million dollars. So you know, they’re now being exposed to huge capital gains.”
Mr. Da Costa said that the announced tax change is prompting sellers to change strategies, with some opting to lower their asking prices in a bid to close a sale before the rule changes. In addition, buyers are now looking at the rush to close sales as a bargaining tool, Mr. Da Costa said.
He said he closed a deal with a buyer this week who calculated the rough numbers on what the capital-gains taxes would be for the seller before and after the tax change as a way of negotiating a better deal.
“It’s a really good position, as a buyer, to approach an owner in Muskoka, or anywhere, if those gains are significantly large,” said David Bemmann, senior vice-president and broker at Sotheby’s International Realty Canada.
Brian Ernewein, a senior advisor at KPMG, said there are multiple options to consider when it comes to the sale of a secondary property, such as whether to sell earlier or sell to someone in the family.
“It’s all a very tough decision. I mean, a personal decision when you’re talking about something like your cottage, but also a tough financial decision as to whether to prepay tax today that you hadn’t figured on incurring versus a possibly even higher tax bill a year or two further down the road.”
Mr. Bemmann said it is best to stay calm and seek the advice of realtors and tax experts. “The worst thing you want to do is panic and take an offer that you just never thought you’d take.”
