Mr. and Mrs. Lee, both in their late 60s, are planning to sell their cottage acquired for $200,000 in 1995 for an estimated $750,000. It has never been designated as their principal residence. They also own a diversified non-registered investment portfolio and are both in the highest marginal tax bracket in their province. Which of the following strategies would be most tax-efficient for dealing with the capital gain from the cottage sale?

Question: Mr. and Mrs. Lee, both in their late 60s, are planning to sell their cottage acquired for $200,000 in 1995 for an estimated $750,000. It has never been designated as their principal residence. They also own a diversified non-registered investment portfolio and are both in the highest marginal tax bracket in their province. Which of the following strategies would be most tax-efficient for dealing with the capital gain from the cottage sale?

Answer options:

• Claiming the principal residence exemption on the cottage, even though it wasn't their primary home.
• Donating 50% of the cottage to a registered charity before sale to reduce the taxable gain. ✅ Selling the cottage and splitting the capital gain equally between them, subject to the capital gains inclusion rate.
• Transferring ownership of the cottage to their adult children before sale to shift the tax liability.

Correct answer: Selling the cottage and splitting the capital gain equally between them, subject to the capital gains inclusion rate.

Explanation: Since the cottage cannot be designated as a principal residence, the capital gain is taxable. Splitting the gain equally between Mr. and Mrs. Lee will ensure each pays tax on only half the gain (50% inclusion) at their individual marginal tax rates, maximizing the use of their high marginal brackets and potentially lowering the overall household tax burden compared to one person claiming the entire gain.