Tag Archives: family cottage

Keeping the Family Cottage in the family

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By John Natale

Special to the Financial Independence Hub

Summers in Canada are defined by the great outdoors and one of our favourite summer pastimes is to head up to the cottage (or cabin) to lounge on chairs, enjoy some cold beverages and toast marshmallows on the campfire for a relaxing time with friends and family.

For those who own a cottage, transferring its ownership to children or grandchildren can sometimes get tricky, with many owners failing to realize the potential tax bomb that awaits. Below is one strategy that may help ensure your property remains a space that will continue to generate positive, loving memories instead of a source of worries and sleepless nights for you and your family.

 An in-depth look at the issues

For many individuals, it is important that the cottage stays in the family so the next generations can continue to enjoy it for years to come. The good news is that when you pass away, assets can be transferred to your spouse tax-free.

However, a transfer to your children, on the other hand, may trigger a capital gains tax that must be paid before the children (or their heirs) can enjoy the property. Canadian households can only use the principal residence exemption (PRE) to protect one property from tax on capital gains. If the PRE is used for the home, then the transfer of the cottage to the children will be taxable.

Over the years, many cottages and other vacation properties have increased significantly in value and are now worth much more that their purchase price. It is important to note that 50% of this increase in value is subject to taxation. Many people are not aware that this could trigger a significant capital gains tax liability for your estate and, if it doesn’t have enough assets to pay for it, the estate may be forced to sell the cottage to pay the tax. Ultimately, your family can risk losing the property altogether.

Selling the cottage now vs. later

By selling the cottage to your children today instead of transferring it when you pass away, you can cap your tax liability and pass the responsibility for any future capital gains to your children. Because the cottage is being transferred now – and will not be included as part of your estate – the family can also avoid the time and costs associated with the settling of an estate while avoiding potential claims against your estate from creditors or other interested parties. Continue Reading…

An innovative way to solve your family cottage dilemma

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By Jason Kinnear, CPA, CA, CBV

(Sponsored Content)

Sipping your morning coffee on the dock with your spouse; teaching your children to waterski; and roasting marshmallows with your grandchildren. These are just some of the treasured memories you’ve created at your family cottage. But times change and those memories can sometimes be replaced with concerns about how to deal with your family cottage dilemma:

You enjoy spending time at the family cottage, but the time, cost and stress associated with it are turning a pleasant summer pastime into an ongoing headache.

To illustrate this dilemma, let’s consider Doug and Barb’s situation. Barb inherited their cottage from her mother just after they got married. They now have three adult children and six grandchildren, and are recently retired. While they’re looking forward to spending more time at the family cottage, they see a number of issues on the horizon:

  • Two of Doug and Barb’s adult children are professionals, while the third owns her own growing company. These time demands mean none of the children are able to visit the family cottage as often as they’d like.
  • There are several steep sections of stairs between the family cottage and the dock on the lake below. While Doug and Barb can navigate these stairs now, they’re concerned they won’t be able to as they get older.
  • Doug and Barb do not know who they will leave the family cottage to.

Time commitment

The most pressing issue for Doug and Barb is the time commitment for maintaining the cottage. They’re the only family members with the time to open and close the property, and maintain it throughout the summer months. While they’re both healthy enough to do this now, they’re concerned that they may no longer be able to as they grow older and their physical health declines.

Costs

There’s also the issue of costs related to maintaining the cottage. The cost of repairs and improvements to host their growing family and their friends means the simple family cottage they inherited from Barb’s mother a generation ago has morphed into a monster home on a lake!

Additionally, there’s the question of how these capital improvements and the maintenance costs will be shared amongst family members. Should Doug and Barb continue to pay for the upkeep? Or should that be split amongst the adult members of the family? How would they split these costs: evenly, or based on actual cottage usage?

Succession planning

Finally, there are the succession and estate planning issues to consider. Which of the adult children will get the cottage? Do any of them really want it? What about the personal taxes triggered when the cottage is transferred, or the probate fees (Estate Administration Tax in Ontario) if they both should pass away unexpectedly?

As you can see, Doug and Barb have a number of issues to contend with. They continue to enjoy the family cottage experience, but need a solution to address these issues.

Consider establishing a Family Vacation Trust

One solution for Doug and Barb to consider is establishing a Family Vacation Trust to pay for their family’s future summer vacations. A Family Vacation Trust would allow their family to continue to enjoy the annual cottage experience without the responsibility and costs of maintaining one.

Here’s an example of how their Family Vacation Trust might work:

1.) Let’s assume the value of the cottage when Barb took possession was $100,000 and it’s currently worth $800,000. Selling expenses will be 5% of the sale price and the resulting capital gain will be taxed at the highest personal marginal tax rate in Ontario*. This situation would result in Doug and Barb receiving approximately $580,000 on the sale of their cottage. Continue Reading…