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If a sale does result in a capital gain, that gain must be reported to CRA, no matter how modest. To calculate the amount, your client must know the adjusted cost base (ACB) of the timeshare, which consists of the actual cost of the timeshare plus capital expenditures, such as special assess- ments used for capital improvements—a new roof, for example.
Doug Carroll, vice-president of tax and estate planning at Invesco Canada in Toronto, says your client’s ACB isn’t affected by timeshare mainten- ance fees because those are current expenses.
Losses on sale are not deductible, says Carroll. “It’s personal-use property, and if you sell it, you can’t take a loss on it.”
When considering estate planning, clients should check if their timeshare agreements expire on death, which often happens with right-to-use timeshares. If the agreement doesn’t expire and your client wants to pass a fee-simple timeshare on to family members, Prekupec says the estate could pay ongoing fees. Another possibility is that the heirs may be stuck with an expense they may not want. Depending on the timeshare, yearly fees can set heirs back $300 to $2,000 or more, and special assessments vary widely.
Prekupec also warns, “As the timeshare depreciates in value, the fees will likely increase.” The timeshare company can’t go after the bene- ficiaries if they don’t pay, but it can go after the estate. Meanwhile, late fees will accumulate.
Carroll suggests clients discuss the situation in advance with family members, who may not be interested in keeping the timeshare. Ngoc Day, fee-only advisor at Macdonald, Shymko & Company in Vancouver, B.C., agrees, noting that a timeshare probably won’t have the sentimental value that a family cottage does.
With fee-simple timeshares located in the U.S., there’s also potential for U.S. estate taxes to come into play if the property brings the estate’s value above US$5.43 million (2015). Still, Day suggests couples own a timeshare jointly to avoid probate fees, at least on the death of the first spouse. With- out joint ownership, a surviving spouse “would have to figure out a valuation for what the timeshare’s worth [was] at the time of death and [have] to pay probate tax on it before the title gets transferred.”
Rental reporting
You may have a client who wants to either rent
out her timeshare when she’s not using it, or her primary residence if she’s planning a long vacation away from home.
One way to find tenants is through California- based Airbnb (airbnb.ca), which lists rental proper- ties—homes, apartments or even rooms—in more than 34,000 cities. (Others include VRBO.com and HomeAway.com.) To list space, your client fills out a free online form detailing house type, room type (if applicable), number of people the rental accommodates, and location. The company verifies renters’ personal profiles, offers a mes- saging system for hosts and guests and collects payment, keeping 3% per online booking.
Prekupec says clients listing property online should understand the agreements they enter into with these sites, including how the company screens renters and the payment terms.
Carroll adds that rent must be claimed as income—even if it’s only from a week or two of renting. Day notes clients with U.S. timeshares or property must declare U.S. income, and the process can be onerous.
“You have to get your tax-reporting num-
ber, [similar] to a SIN here, for the U.S., and that’s complicated,” says Day, not to mention the complexity of U.S. tax forms. The penalty for not reporting is usually 5% of the unpaid taxes for each month a return is late, up to 25% of unpaid taxes. There are additional penalties for failing to pay taxes owed.
Worse, a rented fee-simple timeshare can
make clients subject to CRA’s foreign property reporting rule, which kicks in if the total foreign property cost is more than $100,000. Clients then have to fill out the T1135: “The timeshare value itself may be small, but if you add it to the U.S. stocks that you already own, that may bring it over to $100,000, so now you may end up with extra tax reporting to CRA.” The penalty for not filing the T1135 is $25 per day, up to a maximum of $2,500 per filing year.
Aurèle Courcelles, director of tax and estate planning at Investors Group in Winnipeg, says U.S. withholding tax on foreign income, which is 30%, “adds a whole other level of complex- 24
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