Many Northern Ontario families enjoy the summers with quality time at the cottage. Fond memories of family barbeques, fishing, tubing, water-skiing or watching the sunset evoke strong emotional attachments to the cottage. These attachments raise difficult issues when it comes time to deciding how to deal with cottage succession.
Often the simplest solution is to sell the cottage. Whether you decide to sell the cottage or keep it in the family, the issue of taxation will be present. Unless you qualify for the principal residence exemption, the increase in value of the cottage over what you paid for it plus your costs of improvements will attract capital gains tax upon a transfer by way of sale or gift or upon deemed disposition on death. Especially if you’ve owned the cottage for a long time, the amount of capital gains tax will be significant. To plan for payment of the tax, estate planning options such as establishing a fund or purchasing life insurance to offset the potential tax liability, or designating the cottage as your principal residence may be considered.
What if you plan to keep the cottage in the family? Leaving the cottage to your spouse on your death will defer the capital gains tax until his or her death. If you plan on leaving the cottage to your children, you can transfer all or part of your property to your children during your lifetime by making a gift to them, giving them a joint ownership interest, or transferring the property to a trust. Unless you qualify for the principal residence exemption, such transfers will mean the immediate liability to you of capital gains tax. Your children will pay the capital gains tax on subsequent increases in value when they dispose of the property.
To minimize disagreements between co-owners, it is optimal require that a co-ownership agreement be signed. Such an agreement should cover such topics as decision-making, assignment of responsibilities, sharing of expenses, incapacity or death of an owner, and the sale of a co-owner’s interest.
If you plan on leaving the cottage to your children only after your death, you might structure your Will to give them an option to purchase the cottage with the funds coming from their share of your estate with a provision that they sign a co-ownership agreement.
What happens to the cottage after death can result in unwelcome expenses or can trigger tense relationships. Fortunately, these situations can be avoided by having family meetings and by making an estate plan.
For help with your estate planning, BETTER CALL BOB @ (705) 268-0908, email: bob@yulawoffice.ca