How your clients’ homes could become their biggest tax headaches
Mistakes & best practices around HNW properties
Loeppky says that the principal residence exemption is a powerful tool that advisors and clients can use to navigate some tax issues around one property. However, the choice as to which residence to claim under that exemption is an important one, and it should be optimized based on levels of appreciation enjoyed by a particular property.
Clients will often think that transferring, gifting, or selling properties to family members can end up avoiding some of those tax issues. She notes that in the eyes of the CRA, a sale, gift, and transfer are treated as functionally the same thing, with transfers treated as deemed dispositions. She says that some clients think there won’t be a tax bill if a realtor isn’t involved, when there almost always will be.
Beyond education on how transfers and gifts won’t necessarily save much on tax, Loeppky says advisors should also remind clients to keep track of the cost base in any property they may own. The cost base on the sale of a property will have to be substantiated and accurate record-keeping is essential.
Advisors also need to stay cognizant of the jurisdiction a property is located in. That might mean bringing in local experts who know property markets and tax codes that a Canadian advisor might not be aware of. That also means holding to certain rules of thumb. Loeppky gives the example of a property in the United States that a client wants to hand over to their child. In Canada, a property is typically inherited on a stepped-up basis, meaning a Canadian tax bill would be incurred by the transfer of the property. In the US, however, property is not inherited on a stepped-up basis, so when the child sells that US property they could incur a capital gains tax based on the cost their parents initially paid. Effectively, that results in double taxation. This is why Loeppky says it’s best to avoid gifting US property.
While some form of tax bill on the dispersal or sale of a non-principal residence is inevitable, Loeppky says that other estate planning tools can help counter-balance that bill. For example, clients might not take dividends from their corporation in the year they sell a property, spreading taxable income across multiple years.
