Tax and financial advisors should make an effort to review their clients adjusted cost base records as part of the annual Year-End Tax Planning routines now ’til the end of the year, especially if the family owns a taxable cottage property.
Ancient tax law is important in these cases. Dating back 20 years to February 22, 1994, digging out the Capital Gains Election form could save tens of thousands of dollars on an actual or deemed disposition, which can happen at death or immigration, for example.
The $100,000 capital gains election available was eliminated on February 22, 1994, but taxpayers were able to elect to increase the adjusted cost base of assets by the amount of accumulated appreciation (up to $100,000) and the form T664 was used to do this. If assets owned in 1994 are still on hand, look for that form now or call CRA to get copies of the information to ensure that cottage transitions record those values as the adjusted cost base. Otherwise, the danger is the lower, original cost base values will be used, and this can cost the family thousands.
John and Susan, for example, inherited their family cottage from Susan’s mom and dad in 1985 when it was valued at $25,000. After adding a new deck and bathroom and revaluing the cottage on February 22, 1994, they found it was worth $95,000. They were able to elect to increase the cost base by $70,000 by filing form T664 on February 22, 1994.
Today the cottage is valued at $395,000. If they use the original cost base, their capital gain on disposition will be $370,000 and half of this ($185,000) will be added to Susan’s income on disposition, assuming this property is not their principal residence. Assuming a marginal tax rate of approximately 47%, the taxes owing would be approximately $87,000.
However, if the elected value is used, the capital gain would be $300,000; half of this ($150,000) would be added to income and the approximate taxes payable would be $70,000. By using the elected value, the family saves $17,000 in taxes.
It’s Your Money. Your Life. Seek the services of a DFA-Tax Services Specialist and an MFA-Retirement Income Specialist in making plans to reduce taxes this year end. These specialists can alert you to important and little known tax advantages that will add significantly to your family’s Real Wealth.
Evelyn Jacks is President of Knowledge Bureau and author of 51 books on tax and personal wealth management. Meet Evelyn on the Year-End and Business Succession Planning Bootcamp tour this November. Follow Evelyn on Twitter at @EvelynJacks.