Capital gains surprises on the sale of your co-owned cottage


Q. My sister Marie and I own a cottage and right now, she is selling her home and becoming a ‘snowbird’. She is considering making the cottage her ‘primary residence’ and spending the other six months in the southern States. I currently rent and am wondering:

  1. Do I need to be notified/approve of her making the cottage her primary residence?
  2. If the cottage were to be sold (and it is considered her primary residence) would it only be me paying capital gains tax on my portion?
  3. Do you have any suggestions on how a legal document would be written to allow a fair division of funds if the cottage were to be sold?

Thank you, Claudine

A. Claudine, what a great question! It’s surprising how confusing property and tax matters can get as soon as we stray from the standard one-owner, one-use formula. The good news is that you and your sister can both enjoy your lifestyle choices, the cottage (and the sale proceeds, if you choose to go that route) and stay in the good books of the Canada Revenue Agency.

To answer your first question — do you need to be notified of your sister’s change in use of the property? — the answer is no. Of course, when siblings (or anyone else) co-own a property it’s always a good idea to have open communication and to notify one another of upcoming changes. But there are no laws that dictate what type of communication, when or even if it must happen. The only exception to this is whether or not you and your sister entered into a joint-venture or co-ownership arrangement where the parameters were set out either in the purchase and sale agreement or in a separate contract.

READ: Avoid tax and probate when passing on the family cottage

As for your capital gains question: It’s actually your sister who will need to pay capital gains, not you. I know. Curveball, right? Let me explain why. Your sister already owns and lives in her primary residence, so her half of the cottage is actually considered a secondary residence. Since all property sold in Canada is subject to capital gains and the only exemption from having to pay this tax is to claim the property as your primary residence, it’s your sister who must pay capital gains. Now, she may decide to pay capital gains on her home, once she sells it, and shelter any potential profit on the cottage with the primary residence exemption (PRE) or she can shelter her home using the PRE and pay capital gains tax on the cottage once it is sold — but she will have to pay capital gains tax. My suggestion to her is to seek out the advice of a good tax accountant who has dealt with these situations in the past.

As for you, you shouldn’t have to pay capital gains on the sale of the cottage, period. Since you are renting you only own one property and, under tax laws, you may claim this property as a primary residence as long as you regularly and habitually use the cottage. There are no “rules” but the taxman will get suspicious if you try and claim PRE for your portion of the cottage and, yet, you never or rarely stepped foot in the dwelling.

READ: Cutting down capital gains tax on real estate sales

Finally, when it comes to the fair division of funds once the property is sold the law is pretty clear. If you hold the cottage as joint owners, and not as tenants in common, the division of the asset is 50/50 and so are the proceeds of the sale. From those proceeds, you and your sister are then responsible for any taxes that need to be paid (she would owe capital gains tax, you wouldn’t if you claimed it as your primary residence).

The difference between the two types of ownership can get complex but in the most basic state it’s the difference between the two of you purchasing/acquiring the property together, at the exact same time or one of you buying the property and then adding the person after the fact (say a month, a year or 10 years later). Tenants in common ownership is typically associated with the ability to sell or pass on your portion of the asset independently of the other owners and doesn’t usually occur in real estate transactions without legal intervention at the time of purchase.

I hope this helps clarify the situation you and your sister are in and that this clarification will help you both to make better decisions about the property.



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