The redneck tax

The finance minister, she of The Budget Bomb, owns a couple of rentals with her husband, Graham, in the UK. Makes sense, since he’s a British writer and report for the NY Times. She also owns a hunk of a property in Alberta (in partnership). But apparently there’s no family cottage.

Good thing. She just declared war on them.

You may have heard the feds say yesterday, when the punitive capital gains tax was bloated, that just the rich would be affected. “Only 0.13 per cent of Canadians with an average income of $1.42 million are expected to pay more personal income tax on their capital gains in any given year,” said the budget. But that’s a lie. We all know it.

People dumping investment rental properties like hers – because of anti-landlord regulations (which her Renter Bill of Rights encourages) – could be whacked by this change. Family trusts just had the rug pulled out from under them. And many unsuspecting cottage owners, plus their children, could be in for a rude surprise.

First, understand what’s going on in cottage country. It ain’t happy stuff.

Covid, then 6% mortgages, pretty much spanked the recreational property market hard. Sales cratered. Prices followed. For example, a year ago average sale prices in Ontario’s prime Kawartha region crashed 32% year/year – from a crazy $1.24 million all the way down to a still-nuts $855,900.

Since then, no real recovery happened even as mortgage rates trimmed. Sales are running 35% below the 10-year average. The Lakelands real estate cartel reports another 1% drop in prices this year. The benchmark Frankenumber for single-family homes is currently $708,000. The median value of prime waterfront homes is just over nine hundred.

Scarier for people with big cottage mortgages who can’t sell is an increasing default rate in lake country – which pressures prices and encourages vultchers. Now Chrystia is swooping in for the kill, with a shocking change set for the Tuesday prior to the pivotal long Canada Day weekend.

So the tax on capital gains is growing. Instead of including half of an entire gain in income – regardless of the size – now two-thirds of the profit above $250,000 will be taxable. So on that $940,000 waterfront property you paid $300,000 for twenty years ago, the tax goes from $96,000 (if your tax bracket is around 30%) to $115,890.

What to do?

If you’ve been thinking about bailing out of the cottage, sell. But, of course, it’s already too late. There’s probably a zero chance of preping and listing the place, going to market and eventually finding a buyer then closing the deal in the next eight weeks.

What about gifting it to your kids?

Then hurry. That takes some time, too. And gifting also means you’ll be on the hook for capital gains tax, and at the same rate. (Only principal residences can be passed along without the CRA getting its talons into you.)

Another option, if your kid weirdly doesn’t want the mouse-infested shack in the middle of tick heaven, is to declare the cottage your principal residence once you’re able to snare a buyer. As this blog has explained in the past, you’re allowed to pick a property in any tax year as your PR, and sell without being taxed on the gain. But in order to do that, you must actually occupy the place during a portion of the year, and it knocks your city home out of contention for a tax-free profit.

If you have no intention of selling, accept the cap gains hike is probably going to cost equity. This is a significant negative for the entire recreational property market – cabins, hobby farms, lakefront McMansions or off-grid retreats. And it makes you wonder how long it will be before the Libs (if re-elected in 2025) drop that $250,000 quota and make 67% of all gains taxable at the personal marginal rate. That would also whack everyone with a non-registered portfolio account. Ouch.

But then, we know the federal government does not want you to have a rustic cottage, a bunker or even an F-150 with a gun rack and a thirsty gasoline engine. The future is density. Condos. Urbanity. EVs and fourplexes. That way she can keep an eye on you. Hick.

About the picture: “I’m 33 and live in Toronto in a rent controlled building where I have been for 10 years,” writes Erik. “My rent is a hilarious $1400/month for 2 bedrooms, so I have accepted the fact I should not move anytime soon if I want to save any money for other things. I am content with that after re-wiring my brain (you know… the infamous “but son you gotta have a house” mindset that had to be undone). Here is a picture of my Pup, Iris, because she looks very majestic on this one and she is what keeps me sane these days. Do not let the proper pose fool you, though. She is a complete weirdo generally speaking.”

To be in touch or send a picture of your beast, email to ‘[email protected]’.