Have you ever sat at the cottage watching a storm roll in? The sun might be shining where you are but you can see the tops of those high, billowing, cumulonimbus clouds off in the distance. Gradually the wind picks up and you hear the first deep rumblings of thunder as the storm introduces itself and lets you know that it is time for everyone to get out of the lake. It is possible that the storm might blow by or take a while to reach you but the experienced cottager knows when it is time to seek shelter from the pending storm.
Cottages often present us with juxtapositions. They can be the country retreat that offers respite from fast-paced city life. It can be both a place of much hard work and a place to re-connect with nature. A place to spend quality family time or to share boisterous gatherings with friends. These attributes create deep feelings and memories and can cause family members to fall in love with the location; wanting to ensure that future generations can share similar experiences. Quite often it is these strong emotions that mix together with the financial, legal and accounting issues to create an interesting set of dynamics around cottage succession. With a good plan, cottage succession can be a smooth experience.
The following list is not exhaustive, but some of the typical family issues and discussions that arise around the future ownership of a cottage can include:
- Which, if any, of the children would be interested in future ownership?
- Will family harmony be maintained?
- Does the next generation have the financial resources to maintain the cottage?
- Will there be large capital gains taxes owing when the cottage changes generational ownership?
- How will the capital gain taxes be paid?
- Will some tax and probate savings be realized if full/partial ownership is transferred prior to death?
- Where specific children are to receive the cottage, are there sufficient assets to ensure an equal estate is passed on to the remaining children?
- Are there sufficient, liquid assets to sustain the lifestyle of the current owners or would the sale of the cottage provide additional assets and cash flow for the current owners of the cottage?
Tax rules change frequently and a tax advisor should be consulted to ensure that cottage succession plans properly address current tax concerns. A proper plan should determine the Adjusted Cost Base (ACB) of the property which should include the cost paid to acquire/build the cottage and costs of improvements. Capital gains occur if you sell the property for more than the ACB. If the cottage is held until death, the government deems that the cottage was disposed of at its fair market value which may result in capital gains taxes payable at that time. Certain provinces and territories in Canada also impose probate fees based on the value of the deceased’s estate assets.
There are other considerations such as the Principal Residence Exemption and Alternative Ownership Arrangements but it is important to understand, in advance, what the legal and tax implications are before you begin making changes. Sometimes, insurance can be one of the most effective ways to pay the future tax bills or to equalize an estate between children. A well thought out agreement that addresses scheduling, financial contributions, decision-making and the future sale of the property can also go a long way in ensuring that summers at the cottage continue to provide positive, memorable moments.
Proper cottage succession planning can alter the course of that metaphorical storm on the horizon. We can help.
Call Matthew at 519-780-4171, for a copy of Richardson GMP’s full Cottage Succession article.
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