The 1994 Capital Gains Election: What Cottage Owners Need to Know

Selling a family cottage is a big decision, both financially and emotionally. Several of our clients have sold one recently, and the same question keeps coming up: “Did we make the 1994 election, and what does it mean for us now?”

In this article, Access Private Wealth Corp. (APW) explains what the election was, why it can still lower your tax bill decades later, and what records to keep for any property that isn’t your principal residence.

WHAT WAS THE 1994 ELECTION?

Until 1994, every Canadian had a $100,000 lifetime capital gains exemption that could shelter gains on almost any type of property. The federal budget of February 22, 1994 ended this general exemption.

To let people use whatever exemption they had left, the government offered a one-time election. Owners could report on their 1994 tax return that they had “sold” a property on February 22, 1994 and immediately bought it back. Nothing actually changed hands. The gain on this deemed sale was sheltered by the unused exemption, and the property’s cost for tax purposes, its adjusted cost base (ACB), was increased.

A higher ACB means a smaller taxable gain when the property is eventually sold. The election was made on Form T664, normally filed with the 1994 return by April 30, 1995 (late filings were accepted for two more years, with a penalty). It can no longer be made today.

The key point: if you made the 1994 election on your cottage, your cost for tax purposes may be higher than what you paid. That can mean less tax when you sell, but only if the election paperwork can be found and the figure is applied correctly.

WHAT IT MEANS WHEN YOU SELL

If you made the election, the figure to use when you sell is the new adjusted cost base shown on your 1994 T664 paperwork, not your original purchase price.¹ Using the wrong number can mean overpaying tax, or under-reporting the gain.

If the cottage was ever your principal residence, or you plan to designate it for some years, the election interacts with the principal residence exemption. That calculation is done on Form T2091(IND), and the sale of a principal residence must be reported on your tax return.

CAN’T FIND YOUR 1994 PAPERWORK?

• Check your 1994 tax return for Form T664 and the capital gains election supplementary page.
• Contact the accountant who prepared your 1994 return.
• Ask your tax professional to request records from the Canada Revenue Agency (CRA).

If no election was made, your ACB is generally your original cost, plus eligible improvements.

WHAT TO TRACK FOR A NON-PRINCIPAL RESIDENCE

Whether or not you made the 1994 election, good records are the best way to keep the tax on a future sale as low as the rules allow. For a cottage, rental or other secondary property, keep:

WHAT TO KEEP	DETAILS
Purchase details	Price, closing date, legal fees, land transfer tax and other closing costs.
Capital improvements	Additions, a new roof, dock, septic system, winterizing, with receipts and dates. Routine repairs and maintenance don’t count.
Your 1994 election	A copy of Form T664, the value you elected, the new adjusted cost base and any appraisal or support for the value.
Pre-1972 value	If the property was owned before 1972, its value on December 31, 1971 (“Valuation Day”).
Ownership history	Whose name is on title, and any transfers between spouses, to children or to a trust, or by inheritance, along with the value at the time.
Principal residence years	Which years (if any) you designated the property as your principal residence. Since 1982, a family can generally designate only one property per year.
Changes in use	Dates you started or stopped renting it out or living there full-time. A change in use can trigger a deemed sale.
Rental history	Rental income reported and any capital cost allowance (tax depreciation) claimed, which can be taxed back on sale.
Selling costs	Real estate commission, legal fees and other costs of the sale, which reduce the gain.

Keep these records for as long as you own the property and for at least six years after the year you report its sale.

PLANNING AHEAD

Many families hope to keep the cottage for the next generation. Tax applies on a transfer to children and on death, not only on a sale, so the same records matter. Planning early, including who will own it, how the tax will be funded and whether the principal residence exemption should be saved for it, gives your family more options.

HOW WE CAN HELP

Through The Access Formula, APW’s planning and modelling process, our team can review your property’s cost history, help you locate 1994 election records, and model the tax impact of a sale or transfer. We work alongside your accountant so the numbers on your return are right. To start the conversation, reach out to your APW advisor.