An Introduction to Cottage Succession Planning
Debbie Bongard - Jun 30, 2021
For many Canadians, summer is a time for long Friday night drives out of the city, warm days by the dock and cool nights by the fire. As the temperatures rise, the whole country dives headfirst into cottage season. A cottage is a place I want to pres
An Introduction to Cottage Succession Planning
For many Canadians, summer is a time for long Friday night drives out of the city, warm days by the dock and cool nights by the fire. As the temperatures rise, the whole country dives headfirst into cottage season.
For my family, Pointe au Baril is our second home, a community I care about deeply and a place that houses so many precious family memories. Like so many Canadians, a cottage is a place I want to preserve for generations to come, but passing down a cottage is not always as simple as it may seem.
Not only do cottages hold significant sentimental value to families, but they are often also a hefty financial asset. The value of Canadian cottages is quickly on the rise. Prices have skyrocketed over the last year as people abandoned their city lifestyles en masse and sought respite in the calmness of country life. In fact, a survey by Royal LePage found that Canadian recreational property prices increased by 16% last year and are expected to rise an additional 15% in 2021.
So, with all this in mind, how can you successfully pass down your family property? Let’s start with the basics. Here are a few key things to know about successful cottage succession planning.
1. You have to pay to pass down
Unfortunately, you cannot simply gift your property to the next generation free of charge. Like most transfers of assets, you must be prepared to pay taxes.
Whether you hand the property down or sell it to your children at a discounted rate, the Canada Revenue Agency will make sure it’s ‘sold’ at fair market value. The parents will be charged capital gains tax which accounts for the difference between the cottage’s current market value and the adjusted cost base (the amount it was originally bought for plus the value of any improvement expenses, like renovations).
While there are some possible ways to reduce this tax like if it served as your primary residence for a significant period of time, parents should still be prepared to cough up a fair amount of change for capital gains.
Canadians in some provinces will also have to pay property transfer tax. You’ll want to do your regional homework on this as it can be quite hefty, notably for those in British Columbia.
2. You may want to consider creating an asset-protection trust
In the process of passing on the cottage, many families fail to consider protecting their assets from future financial challenges. What happens if one of your children goes bankrupt or gets divorced? Who takes the cottage then?
By creating an asset-protection trust for the cottage, owners are protected for 21 years from third-party claims from divorce, creditors or trustees of bankruptcy.
The trust also has the added benefit of allowing owners to defer paying capital gains tax that is incurred during that 21-year period. This means the next generation could essentially skip paying taxes during that time. But don’t let this fool you - you will still have to pay capital gains tax at some point. The real question to consider is do you want to pay now or later when the property is likely worth even more?
3. Transferring through your will could cost you
Although some parents want to hold on to their cottage for as long as possible, and rightfully so, it’s worth noting that the most cost-efficient method of transferring the family property is when both owners are still alive.
If the cottage is left in a will, executors in certain provinces will have to pay probate fees on the value of the cottage, on top of the other expenses. If it’s left to the surviving spouse, they will pay the fees. If it’s left to the children thereafter, they will pay probate again when they inherit it.
If you do choose to leave it in your will, we strongly advise that the property is at least originally held in a joint tenancy between spouses to avoid these, often expensive, probate fees.
4. Start the conversation early
Unfortunately, the process of transferring down a cottage can be quite a bit more stressful than the easy-breezy lifestyle you associate with the property. That is why, like with many financial and legal processes, it’s important to start the conversation early. Be realistic. Which of your children wants the cottage? Who can afford it? What personal family disagreements might this cause?
It’s never easy dividing assets, especially when there is so much sentimental value attached. But as we always advise, the harder the conversation may be to have, the more important it is to have it early on.
This list is just a starting point to understand the ins and outs of cottage transfers. Although the process can seem complex and confusing, meeting with your Financial Advisor can help you sort out the right approach for you and your family.