Cottage owners try to sell them to avoid paying increased capital gains tax on them, realtor says

Floren Lukatsky’s plans for his Ontario cottage have been up in the air ever since the federal government announced an increase in the capital gains tax for many Canadians who own a cottage or investment property.

 

Three years ago Lukatsky and his wife bought a cottage in the Municipality of Marmora and Lake, renting it out with the hope of making it their primary residence when they retired. But now that the capital gains tax has increased for those who make a profit of more than $250,000 when they sell, the couple is thinking of selling the property sooner than originally planned.

 

“They’ve given two months’ notice before implementing it,” he said. “I don’t know that if we list it now we’ll sell it in time and get our money back; the (cottage) market is doing poorly … (the government) really put people in a tight spot.”

 

Experts say they expect an “uptick” in cottage listings as Canadians with a secondary home or recreational property consider whether they should try to sell their property before the tax changes take effect on June 25.

The changes proposed in last weeks’ federal budget would see the capital gains inclusion rate, which refers to the taxable share of profit made on the sale of assets, rise to two-thirds from half for individuals who realize capital gains above $250,000. For corporations and trusts, all capital gains, regardless of amount, will be taxed at the two-thirds inclusion rate.

 

“This tax change will have a devastating effect on families’ ability to keep the next generation in the cottage, which could have a profound cultural impact on our heritage and way of life as Canadians,” said Lesley Lavender, CEO of the Federation of Ontario Cottagers’ Association.

 

“It’s crucial that any tax measures consider the unique circumstances of cottage owners and preserve their ability to maintain these treasured properties within their families.”

 

A couple who inherited their waterfront property from parents in the early 1980s when the average cost of a cottage was around $75,000, she said, could have a property with a fair market value today of over $1,000,000, according to Royal LePage’s 2024 spring recreational property report. That would represent a $925,000 capital gain upon disposition of the cottage in a sale or even by gifting the cottage to the kids, of which $675,000 would be taxed at the new higher rate, Lavender said. Taxed at the higher rate, the change could add an extra $35,000 to $40,000 to an inheritor’s tax bill.

 

Muskoka-based broker John Fincham said he’s received a noticeable increase in calls from cottage owners on what they should do about their property, especially from those who want to gift the cottage to a family member. He forecasts a jump in listings before June 25, but the cottage real estate market is oversaturated with listings and there’s low demand due to high interest rates.

 

“We’ll definitely see an uptick of listings,” he said. “Whether that equates to sales is the bigger question. There’s double the amount of inventory in Ontario now compared to a year ago and they’re spending double the amount of time on the market.”

 

That’s because over-leveraged cottage owners’ mortgages ballooned with drastically higher interest rates and they need to off-load the property, but buyers are still on the sidelines waiting for interest rates to come down, he added.

 

Developers are also impacted and will want to sell cottage properties before June 25 if their project will be completed in the coming months, said Stefan Kontos, sale representative at Re/Max Professionals North.

 

“I’m expecting an offer on a development project today and have to have it close before the deadline,” he said. “I expect a push for new listings before the May 24 weekend, as the summer kicks off.” Typically, Kontos does a quick closing time of 30 days, so that anyone hoping to sell in the next few weeks will be able to have the transaction done before the end of June.

 

But many cottage owners won’t be rushing to sell, said Christopher Alexander, Re/Max Canada president, as many have the intention of passing their property down to the next generation. He expects some people might transfer their cottage to intended family now before the deadline, but he didn’t think the number would be significant.

 

“Many people see their cottage as their second home and a place to make memories in and these new rules won’t change that,” he said. “But it will maybe put some fire under those who were already planning on selling in the next couple of years to do so now.”

 

 

 

 

This article was first reported by The Star