His decision was surely based on good intentions, but more than a quarter of a century later, he has to admit that it was no masterstroke. This will result in a painful tax bill. What hurts the most is that it should never have existed.
Let’s call him Gérard.
Nearly 27 years ago, Gérard bought a house for himself, but designating his daughter as owner.
Why ? I do not know !
Was he afraid of bankruptcy at the time and was he trying to protect his property from creditors?
Did he just want to save his daughter the paperwork when she died? Who knows.
I did not ask Gérard, because it was his daughter who wrote to me. Let us designate this one by the pseudonym Agnès.
The situation is unfortunate, because by putting the house in the name of his descendants, our man compromised the possibility that the property could benefit, on resale, from the tax exemption for principal residence.
Practically, it is Gérard’s house. He paid for it, lived in it, maintained it and, at 90, he still lives there. Since its acquisition, it has more than tripled in value.
If he had put his name on the contract rather than Agnes’, the profits would have stayed with the family. But as her daughter finds herself legally the owner, that she has never lived in this house and that she probably also has her own residence, she will have no other choice but to share part of the profit with the tax authorities when he disposes of the property. Two properties of the same person cannot benefit at the same time from the exemption for principal residence.
When the house is resold, half of the profits (50% of the capital gain) will be added to Agnes’ taxable income.
How to reduce the tax bill?
Our reader didn’t write to me just to tell me this anecdote, she was reacting to a text on RRSPs published in our pages last week.
Agnes is 66 years old and has invested in her RRSP during her lifetime, but she has about $ 30,000 in unused contribution room left.
She has five years left to contribute to her RRSP, because at 71, she will have to convert it to a RRIF.
Despite his 90 years, his father does not seem to be on the eve of leaving his home. According to her, it is very likely that the day she sells the house, she will no longer be able to use her RRSP to reduce her tax bill.
Hence her question: can she contribute to the RRSP over the next few years and claim the deductions when she is over the age of 71, in the year when her income will jump after the sale of the house occupied by his father ?
The question is a good one.
The answer: “ouiiiii”!
Profits made on a house are exempt from tax when it is designated as a primary residence.
When contributing to the RRSP, a taxpayer is not required to take the deduction in the same year. He can use it at a time when his income and marginal tax rate are higher.