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Legal Matters: Spreading capital gains out over years

Capital gains on the sale of a cottage are fixed, but could be spread over a few years if payments for the sale also are.

Real estate lawyer Cowan advises a reader on buying a cottage from their grandfather.

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Real estate lawyer Cowan advises a reader on buying a cottage from their grandfather.

I am discussing with my grandfather buying out the family cottage and he has received some advice that the payment on the capital gains can be spread over a period of time depending on how he is paid.

I am sure he would prefer not to pay the government in a one-time payment because that could be a strain on his financial resources and he may have to sell other assets to satisfy the payment. Can this be done?

Nothing replaces good tax advice from an accountant but when it comes to the disposition of a capital asset such as a cottage — which is not a person’s primary residence — I do know that you can spread the payment of capital gains over a five year period if the payment for the sale is also spread over the same period.

So, say your grandfather bought the cottage 20 years ago for $300,000 and you agreed to purchase it from him for $500,000. The capital gains on the asset are $200,000 and the tax payable would be $50,000. If you agreed to pay him over a five-year period, then he would have to claim and pay $10,000 in capital gains each year for five years.

It wouldn’t reduce the net tax burden but it would mean that if he was on a fixed income, the tax could be paid each year and would not stretch him financially.

This is an easier and more palatable way to transfer the family cottage from one generation to another.

Jeffrey Cowan is a real estate lawyer and can be reached at jeff@cowanlaw.ca.

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