Can You Avoid Capital Gains Tax?

I've had a few files recently where the main question the client wanted answered was, "How can I avoid the capital gains tax?"

Unfortunately, the answer is (most of the time), "You can't."   Minimize? Yes.  Avoid? No (with one exception, as I'll point out below).

Take, for example, the client who has a second property that he rents out.  It has increased in value significantly since he purchased it three years ago.  He is trying to figure out how to deal with the potential capital gains tax his estate would have to pay on his death. 

The first suggestion is to put it into joint ownership with the eventual heir.  However, the Canada Revenue Agency (CRA) will treat this as a partial distribution and the client will have to pay tax on half the gain as soon as it's transferred.  He will also expose himself to the creditors of the joint owner and may end up losing his property if the joint owner has credit problems.   Furthermore, his estate will have to pay tax on half the gain again when he dies.  Even though the property will transfer easily with the right of survivorship, CRA will still treat it as a disposition. 

Another frequent suggestion is to sell the property at less than fair market value to the eventual heir.  Unsurprisingly, CRA has caught on to this.   Say you purchased property for $10 and it's now worth $100.  You sell it to your child for $50.  Not only will the CRA tax you on the gain between $10 and $100, it will use $50 as the adjusted cost base when your child disposes of it, meaning that the gain between $50 and $100 will be taxed twice.  So much for that idea.

The one way you can avoid paying capital gains tax entirely is if the asset in question is publicly-traded securities.  Recent legislative changes state that you do not have to pay capital gains tax on publicly-traded securities if those securities are donated directly to a registered charity. 

Furthermore, charitable donations can always be used to minimize your estate's overall tax bill.   In Alberta, donors now receive a 50-cent tax credit for every dollar over $200 that is donated to a registered charity.  This means that a charitable donation of $10,000 will result in a tax credit of $5000. 

And as always, it is a good idea to get tax advice before you make a significant purchase of capital assets.  If purchasing the property will have unintended consequences, it might be better not to make the purchase at all.       

Comments

[George]

What would be the implications if the property is owned by a corporation with family members as officers? If one family member dies, would the property simply remain owned by the corporation and be able to pass to future generations that way?

[Erin]

Yes it would. The family members should be shareholders (shareholders, not officers are the true owners of a corporation, although an individual can be both a shareholder and an officer). The tax would be triggered when the corporation sells the assets and would be paid by the corporation, not the individual.

[Jen]

Hello, I have a question that has concerned me. My husband and I were having credit issues a few years back and his mother and father graciously offered to get a mortgage for us (and put a downpayment that we will be 5% interest on each year). They agreed that it would be "our" house. We pay all the mortgage, taxes, insurace, and pay back other costs incurred, etc. with 5% interest each year. This started in July 2003 and will end this July 2008....The problem is my husband may accept an offer for a job elsewhere and we would like to keep the taxes to a minimum considering that we will be first time home buyers. We would like to sell the house (transfer from them to us and we would get the extra). But, I am worried as to how that would affect them in capital gains tax? Any help would be greatly appreciated.

[SJB]

re above...what if a deceased family member has a joint survivor in stock holdings. Does capital gains need to be paid at the time of death if the survivor retains the investment account in full. Thank you.

[SJB]

re above...what if a deceased family member has a joint survivor in stock holdings. Does capital gains need to be paid at the time of death if the survivor retains the investment account in full. Thank you.

[jay]

i'm going to by a house from my partents that they bought for $69000 a wile back and they line in a house next door. they are going to sell the house to me there son for $85000 and this will pay off both morages on both homes for them. will they be taxed on $16000 cca of will it be the market value and they have been losing money on the rental for some time

[steveking]

Do you mind have a look at TradeMax? A full featured tax software specifically designed for active investors or traders who have multiple accounts to manage their trade data, maximize their gain/loss strategy, prepare their Schedule D.

TradeMax® debuts innovative new tools that enable active investors or traders to effortlessly manage all their trades across various accounts.With customizable Vista® style “Views”. TradeMax® delivers important investment account information right to the desktop, without the need to access Internet. Users can manage their trade data, maximize their gain/loss strategy, prepare their Schedule D. It can import trade data from all kinds of formats files, monitor realized/unrealized gains & losses for current positions, adjust wash sales events, report capital gains/losses in printed Schedule D format or export to popular tax software such as TaxCut®, TurboTax®.

All TradeMax® products are available today at http://www.nolosoft.com

[Charlie Dick]

My parents are elderly and wanted to divide the house up before they were too old to do so.About 4 years ago they transfered title over to my 2 brothers and i. My parents still live in the house and pay the taxes and utilities.When they are out of the house we may rent it out,or should we sell. will we have to pay capitol gains on the house if we sell?