With its vineyards, orchards, and lakeside leisure, the Okanagan makes an easy getaway to another world. It’s no wonder so many people decide to move beyond the realm of Airbnb for a place of their own.
While owning a vacation property in B.C.’s wine country may be a dream come true, making such a purchase calls for sound financial planning.
We asked Nicole Ewing, Vice President, Tax, Estate, and Business Succession at TD Wealth, to share her insights on what to consider when it comes to buying that second home.
Who’s on Title
One crucial starting point when it comes to buying a recreational property is knowing how it’s going to be held, meaning who’s on the title. It’s straightforward if it’s in a single person’s name.
“However, if you’re looking at joint ownership or trusts, with more than one person—perhaps if it’s two couples buying together—that may open up many other issues, including tax considerations and how it’s going to be financed,” Ewing says.
Whether you’re considering drawing from the equity in your existing home or using lines of credit, financing options will have different requirements and time frames involved.
With second homes, the Canadian Mortgage and Housing Corporation (CMHC) has various rules and restrictions related to uses—whether the home is strictly for personal use or if it will be rented, Ewing explains. The CMHC does not insure mortgages on second homes; consequently, you’ll need at least 20 per cent down if you already carry high-ratio financing on another home.
Once financing is in place, buyers may want to have it insured. If something were to happen to you or a joint owner, insurance can help maintain the mortgage payments or pay the mortgage off. Without it, the property may need to be sold.
Different types of insurance exist, including mortgage insurance, life insurance, and joint life insurance.
Then there’s the need for liability and property insurance.
“Insurance can be an intimidating word, but just like other financial products you need to understand what the options are and how it can be used,” Ewing says. “It’s an incredible product when used appropriately. From a financial perspective, if something goes wrong with the property or in the individual’s own life, are those safeguards in place?”
It’s crucial to plan for this financial obligation.
Capital gains tax is triggered upon the sale or gift of the property, or upon the owner’s death.
One tax-savings strategy may be using the principal residence exemption to shelter the capital gain on the vacation home. “The requirement within the Income Tax Act is not based on where you spend the largest portion of time,” Ewing says.
Ewing notes that certain capital improvements or additions that increase the home’s value could potentially reduce the capital gains tax down the road.
“It’s very specific,” Ewing says. “Consider keeping a separate bank account for the property and paper trail of what was spent and get professional advice on how the expenses are classified for tax purposes.”
Wills and Powers of Attorney
If the property is held in one person’s name and something happens to that person, whether it’s death or illness that renders him or her incapable of making decisions, no one else may be able to handle or authorize related transactions without going to court to get guardianship without a will or power of attorney in place.
Having a will also outlines what happens to the property upon a person’s passing. “Is it going to be passed on to the next generation or is it to be sold? If it’s sold what happens to the proceeds? You want to be as clear as you can be,” Ewing says.
“Beneficiaries receive the property after tax, and there can be a lot of confusion around who’s liable for that tax bill,” she adds. “A will can also address expectations and obligations and rights if kids are meant to share the property. It’s not always about money.”