A financial strategy to transfer the family cottage
Canadian cottage owners need to focus on estate planning to ensure that your vacation property will actually stay in the family. Your financial planning strategy will need to include an estate plan to deal with the transfer of ownership. As a Canadian Financial Advisor with Assante Capital Management Ltd., I have looked at a number of different proactive strategies that will help to lessen the amount of tax that is due.
Fresh air…Beautiful sunsets…Water sports…it is amazing how all of these beautiful memories can be treasured if there are no disagreements about cottage ownership, whose turn it is to pay the realty taxes, ongoing upkeep and maintenance costs, or even cooking responsibilities.
I am fortunate to share a cottage with several siblings and their children as well as with my daughter. Our forward-thinking father purchased the property in 1958 and left it to us in his will. We’ve already enjoyed 57 summers at our cottage property. Ownership has survived one marriage break-up and divorce (did you know that even if you inherit a cottage, if it is used as a family home, your ex is entitled to 50% of the value of it, just like the matrimonial home?).
My generation is getting old enough that both we and our adult children think about financial planning and discuss how we will leave the cottage to them. Judging by the number of newspaper and on-line articles on this subject, many Canadians worry about the same issues about estate plans. As a Toronto-based Financial Advisor, I’ve done some research for both myself and my clients on financial planning related to the family cottage. These include not only marriage breakdown, but estate and tax planning.
I would have to say that the #1 concern of most people relates to the taxes that will be due as each share of the cottage passes to heirs. If you have your principal residence in the city and use the cottage seasonally, capital gains tax will be payable at the time the cottage passes to the next owner. As a rule, cottages keep on rising in value, so the tax that will eventually be due also continues to increase. In your financial planning you should consider whether you have other assets in your estate that can be sold to pay the tax bill in order that the cottage remains in the family or should you consider insurance as a source of revenue to pay the tax bill on the entire estate?
Click here to see a calculation of tax due upon death.
However, should you ever leave your home in the city, and live in your cottage full-time, the cottage property could then be declared the principal residence and thus pass to your children without any tax payable. Canadian tax law permits each person or couple to designate one residence as principal. Since mortgage payments in Canada are not tax deductible, a principal residence is not taxed as part of an estate.
In my next post, we’ll look at ways that prudent financial planning can assist with cottage ownership being transferred before death and if any of those can reduce the tax bill.
Through me, you have access to the Wealth Planning Group at United Financial, a division of CI Private Counsel LP which can help provide integrated financial and life management solutions that simplify and enhance your life.
Autumn is a good time for Canadian cottage owners to focus on estate and financial planning to ensure that your vacation property will actually stay in the family.
It’s just good advice.