Canadians still love the cottage.
The latest Royal LePage survey on recreational properties in Canada shows that Canadians are still optimistic about the recreational property market and are feeling a sense of urgency to buy while interest rates remain low.
Cottages are not cheap investments. The average cost of a 1,000 sq. ft., three-bedroom cottage on a 100 ft. waterfront lot can range anywhere from $177,500 to $625,000 depending on the location, but the cost can soar a lot higher into the millions of dollars in prime areas in British Columbia, Ontario and Quebec.
"Despite financial and economic uncertainty, or perhaps because of it, we have found that the enduring value of recreational properties is widely recognized by Canadians," says Phil Soper, president of Royal LePage Real Estate Services. "In contrast to our large urban centres where home prices shot up in recent years before cooling in 2013, the recreational property market has remained remarkably stable and resilient."
Owning a second home raises some tax issues. One of the first is to decide which home you're going to designate as your principal residence.
Capital appreciation on your principal residence is tax free, but you pay capital gains tax on 50 per cent of the appreciation on your non-principal residence.
The Canada Revenue Agency's definition of a principal residence is relatively straightforward and precise. A family unit, which consists of the taxpayer, spouse or common law partner and any children under the age of 18, can designate one property per year as its primary residence. The principal residence exemption allows them to claim a capital gains exemption for some or all of the years they lived in the home.
"People have to realize they must designate one property as their principal residence," says Jonathan Sceeles, a financial adviser with Edward Jones. "It can come down to whether the cottage has appreciated in value more in relation to the city home. In some areas of the country waterfront property may have appreciated more than the city, in which case it might make sense."
Sceeles sees a trend among some Canadians nearing retirement who are deciding to sell their city homes with no capital gains, purchase a cottage and designate it as their primary residence, and then rent an apartment or condominium in the city and share their time between the two locations.
The Royal LePage survey found that the majority of current recreational property owners plan to keep their properties long-term, with 60 per cent saying they are somewhat or very unlikely to sell their property on retirement. Sixty four per cent are not planning to use their recreational home as their primary residence for retirement. However, for those who are, financial feasibility including a more affordable purchase price and reasonable maintenance costs are the most important factors.
Many people plan to hand the cottage down to their children. There are a couple of ways to do this.
You can transfer the cottage into either a trust or joint ownership, which freezes the market value of the property at the time it is transferred. Any future capital gains will accrue to the other owners and won't have to be paid until they sell or die.
In the case of a trust, the whole value of the property will accrue to the beneficiaries. In the case of joint ownership, the new owners only pay their part of the capital gain when they sell or die.
However, you have to pay capital gains made during the time you owned the property until it is transferred.
"From a planning point of view joint ownership is probably the better option because portions of the capital gains tax are incurred at different points in time while a trust creates a kind of capital gains 'balloon' which can all come due at once at a later date," says Sceeles.
If you are planning to transfer ownership to a child or children and you expect them to sell in the future, insurance is available to cover the capital gains that they may have to pay.
A small group of Canadians who made what is known as a crystallization designation of their properties will be entitled to a $100,000 exemption on capital gains made between the time of sale and 1994, when they made the designation. They must refer back to the crystallization designation on form T664 when they sell.
"Canadians have long valued the ability to escape the city to spend time with friends and family," Soper says. "A place to get away from the pressures of daily life seems to be more attractive now than ever."
Talbot Boggs is aToronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.
