FP Answers: What's the best way to minimize taxes when gifting two rental properties?

financialpost.com:

By Julie Cazzin with Allan Norman

Q: My parents own real estate and would like to give two of their rental properties (a condo and a townhouse) to me. Is there a way of setting up a trust to transfer rental property without tax implications? I read about a common estate-planning strategy where you can do an estate freeze with a discretionary family trust, which locks in the current value of an investment portfolio or a business. I also read there are tax-deferral benefits. Is this true? And what would the benefits be?

FP Answers: Lisa, as I’m sure you know, it’s easy for your parents to leave you two of their rental properties through their will. The challenge is how to do it effectively in a way that minimizes the tax and ensures you actually receive the properties.

Capital gains tax accrues over time as the rental properties grow in value above the adjusted cost base (ACB). The tax owing is based on the difference between the ACB and the fair market value, or selling price, and is triggered when a property is sold or there is a deemed disposition that can occur on death.

As a reminder, only 50 per cent of a capital gain is taxable and 50 per cent of the gain is tax free. For example, on a $100,000 capital gain, only $50,000 is taxable based on the combination of all your annual taxable income.

An Ontario resident with a top tax rate of 53.53 per cent would pay $26,765 in tax on a $100,000 capital gain. Keep this number in mind as you think about what you are trying to accomplish with an estate freeze or trust.

Additional tax may also come about due to something called recapture. In a nutshell, owners of rental property can claim a capital cost allowance and deduct building depreciation of up to four per cent annually