What can I do to avoid the capital gains tax when my mother’s cottage is passed on to me and my brother?  In our case, my mother sold her house in 2006 and is leasing at a seniors’ complex. Would declaring the cottage as her principal residence help?
 Leonard Berube, Spruce Grove, Alta.

There are several things you can do to reduce the capital gains tax, and yes, asking your mother to declare the cottage as her principal residence is one of them.

When any asset is passed from one generation to the next, be it real estate or a portfolio of stocks, it triggers a deemed disposition. That means all the capital gains or losses that the asset has built up over the years must be calculated and settled. In this case, since your mother’s cottage is no doubt worth much more now than it was when she bought it, you’re looking at some hefty capital gains, and taxes must be paid on those gains before the property is transferred.

By declaring the cottage to be her principal residence now, your mother can reduce the tax burden, because you get a capital gains tax exemption on your main residence, even if you don’t live there year round. But when the cottage is transferred to you and your brother, says Allison Marshall, a financial advisory consultant with RBC Wealth Management Services, the capital gains tax built up before the declaration will be payable on your mother’s final tax return.

Other methods for reducing the tax payable include deducting the cost of any upgrades that add value to the cottage (so make sure you keep the receipts). Also check to see if your mom filed for the lifetime capital gains exemption—it was eliminated in 1994, but if she registered at the time, that could knock up to $100,000 off the capital gains.

The final option is to transfer the cottage to a trust while your mother is alive. She would have to pay all the taxes owing on the cottage at the time the transfer is done, but when she dies, the cottage would avoid probate. Capital gains tax wouldn’t need to be paid again until the cottage is sold or 21 years passes, whichever comes first.

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