You’ve worked hard to buy that family cottage, and you likely want to keep it in the family for a long while. The financials are a big piece of that and so it’s important to be knowledgeable about the capital gains tax laws.

It’s a taxing situation. Fifty per cent of any appreciated value on your cottage is considered taxable. There are ways of getting around that if you qualify. For example, your cottage could qualify as your principal residence even if you do rent it out occasionally, in which case it would be exempt from capital gains tax.

If you do have to pay capital gains, there are ways those taxes can be lessened. Keeping records of any upkeep or renovation costs is one way of doing that. Make sure to retain all receipts for any work that is done on the cottage. For example, if you do anything to the property that may increase its value—such as adding a dock, for instance—duly note those. Anything you do to increase the cost base of your property will help to reduce capital gains.

Plan ahead. Life has a way of throwing curve balls and they can come hard and fast. It’s best to have your estate planning documents in order and they must include your cottage. If you plan to transfer ownership of the cottage to your children after you pass away, tax liability is capped and any capital gains on the property then becomes their responsibility.

What you might think about doing is transferring the ownership of the cottage while you’re still living—that way you can cap your tax liability. If you receive a promissory note for the property and payment doesn’t go over a fifth per annum, you can spread the capital gain out over five years. What that means is that only 20 per cent needs to be reported each year.

Advantages. Since you’d only reporting 20 per cent gains a year if you do receive that promissory note, you may be able to stay in a lower tax bracket, which is also to your advantage. But if you indicate 100 per cent capital gain in a year, you will likely need to dig deep since you will have to pay more than 50 per cent tax on taxable capital gains—something you’ll definitely want to avoid.