As the summer season comes to a close, many Canadians are enjoying their last days at the cottage with their families. Sitting by the campfire and reflecting on the summer that has passed, thoughts may turn towards the cottage family legacy and the necessary steps to preserve this treasured asset for years to come.
If you’re considering transferring cottage ownership to the next generation in your family, now is the time to have an open and honest conversation with them. This will help you plan to reduce any tax burdens or negative financial impacts such an asset transfer may incur.
Here are our top 3 tips for passing on the family cottage
- Plan a meeting with your family members
If you have more than one child, it’s important to meet to determine if all siblings are interested in keeping the cottage in the family. Is everyone in agreement? Who will be responsible for future upkeep and maintenance on the cottage? Will it be co-owned/shared equally amongst your children or should the cottage be sold as part of your estate with the proceeds split among survivors?
We know this is a lot to think about and recommend consulting with a financial advisor, lawyer, or accountant to assist with formalizing your plans.
- Determine the costs & how they’ll be paid
In the event your children decide to keep the cottage, they will need to anticipate and plan for probate fees, land transfer taxes, and capital gains that will be applicable after your death.
Land transfer taxes typically range between 1-2% of the market value of your cottage. Probate, if charged, is no more than 1.5% of the entire estate value after the first $50,000. The largest cost by far is the capital gains tax. Capital gains are based on the property’s current market value less the price paid (including any improvements made over the course of ownership).
One way to mitigate these costs would be to purchase a life insurance policy that would cover the anticipated capital gains costs to ensure your children are not forced to sell the cottage due to the immediate cost. Your children could pay the premiums since they will receive the benefit in the long run.
Another option would be to add your child(ren) as joint owner of the property during your lifetime. For example, if mom adds her daughter as joint owner of the cottage, ownership immediately transfers to her daughter upon mom's death. There could be tax implications when initially making the addition and there would be legal costs as well. It is best to consult with your lawyer and/or financial advisor or accountant to determine if this option works for you.
If you plan to ‘sell’ the cottage to your children before it becomes part of your estate, keep in mind that it is in your best interests to sell at current market value to avoid double taxation. CRA determines capital gains based on fair market value, not sale price. What that means is that when you sell the cottage to your children you pay capital gains based on the current fair market value less the price you paid, and if in the future your child sells the cottage, they will pay capital gains on fair market value based on current market value less the price they paid.
- Protecting the family assets
Another consideration to bear in mind, if your cottage property is shared between 2 siblings what happens if one sibling becomes divorced or files for bankruptcy protection? There are ways to protect the cottage asset from either being considered an asset to be divided with an ex-spouse or protection from creditors. These discussions should be made with your lawyer to determine how to protect the family cottage best.
As you take advantage of the remaining campfires and fishing trips this season, don’t forget to make plans to protect these and future memories for generations to come. Have those discussions with your children, assess your financial liabilities for your estate and take the appropriate course of action for your family.
Also, speak with your lawyer, accountant and Alterna Wealth Advisor to discuss the best plan for your circumstances.
Book an appointment with your Alterna Wealth Advisor today and protect your financial assets for the future.