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Passing Your Family Cottage To The Next Generation


For many Canadians, the family cottage (whether a rustic cabin or a well-appointed home away from home) has been a means of sweet escape from daily routine where family members and friends can spend quality time with each other. The cottage is truly one of the most valuable family assets—a sacred space to unplug, relax, engage with each other and enjoy the natural world.

Precisely because of the intangible value attached to such properties, you may wish to be especially mindful of how you pass down your family cottage or vacation property to the next generation. Such property transitions can become a source of conflict, not to mention tax liabilities (given these assets’ substantial price appreciation in recent years).

In this article, we discuss 3 strategies to help you manage the tax burdens which may result if you are considering passing down your family cottage or vacation property to your children in Canada.

1. Gift Your Property Over 5 Years

When you, as a parent, transfer your cottage to your children, the Canadian Revenue Agency (CRA) will assume (for tax purposes) that you have disposed of the asset in exchange for fair market value, thereby crystalizing the full capital gain and creating a tax liability for the taxable portion of the gain.

It doesn’t matter whether your children have actually paid you the full market value, some lower amount or even nothing at all—for tax purposes, the result is the same. If the price of your cottage has appreciated, the tax burden on such a transfer can be onerous.

If you wish to transfer your property during your lifetime, you can mitigate the impact of this tax liability by implementing a capital gains reserve, whereby the “sale” (transfer) of the property is spread over 5 years. This allows you to realize the gain gradually over the 5-year period to avoid a larger, single-year tax bill.

To achieve this, you would establish a formal promissory note from your children that would indicate the fair market value of the cottage, with you (as a parent) collecting the proceeds of the “sale” over 5 years. Bear in mind that no payments actually need be made—the note can ultimately be forgiven, while still having the effect of deferring the tax liability created.

On the other hand, if you don’t wish to transfer your property during your lifetime, the next strategy may be useful to you.

2. Use Life Insurance

In cases where you intend to leave your cottage via a bequest in your will, the capital gain and corresponding tax liability will need to be settled at the time of the estate administration.

This may create a heavy tax burden for your children. If there is insufficient liquidity in the estate to settle the tax liability, your children may need to sell other assets to cover the liability.

To mitigate this possibility, you can use life insurance by insuring you and your spouse (the parents) on a joint-last-to-die basis, with the face value of the policy corresponding to the estimated future tax liability. On the first passing, spousal rollover rules will defer the tax payable, meaning that the policy proceeds on the second parent’s passing should inject enough funds into the estate to settle the tax bill.

3. Use A Trust Structure

Lastly, you can mitigate some of the tax burden on your children by passing down the family cottage through a trust.

To implement a trust strategy, you would transfer ownership of the cottage into a family trust with your children as beneficiaries. This transfer would trigger a capital gain on the appreciated value payable by you, resetting the cost base to equal the fair market value at the time the trust takes ownership, thereby reducing the taxes payable in the future (by your children) on further growth.

If you (the parents in question) are over the age of 65, you have the option of setting up an alter ego trust structure to hold the cottage. This allows you to defer triggering the capital gain on the transfer of the cottage until it is actually passed on to your children (who would be capital beneficiaries of the trust), or until the 21st anniversary of the trust’s creation, as this threshold also involves a deemed disposition.

Here you can also use life insurance to provide the required liquidity to pay the eventual tax bill, naming the trust as the beneficiary. Another benefit of using a trust structure is that it allows the property to bypass the estate, and applicable probate fees, entirely. Lastly, a trust will keep the property beyond the reach of estate creditors and any litigation that arises.

The Bottom Line

Minimizing the burden of taxes is one thing, but minimizing conflict is another. Have you had a discussion with your children to ask them what they would like to do with the family cottage or vacation property? If not, maybe it is time to do so, bearing in mind that you always have the option of simply selling the property and gifting the proceeds to your children.

For any of the above strategies, you should seek professional guidance in structuring the arrangement to ensure all criteria are met, to successfully minimize the tax burdens of a cottage or vacation property transfer.

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This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.

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