Keep it in the Family - Cottage Succession Ideas (or other large assets)

Dymond Scruton Advisory Group - Jun 14, 2018

With the Summer months approaching, as does cottage season for a lot of fortunate Canadians.  And, although the serenity of the family cottage or cabin may provide a lot of happiness and memories for families, it is difficult to escape from the tax i

With the Summer months approaching, as does cottage season for a lot of fortunate Canadians.  And, although the serenity of the family cottage or cabin may provide a lot of happiness and memories for families, it is difficult to escape from the tax issues associated with the property's ownership.  As well, issues about who will inherit the property and how it can be done are often issues that can cause significant stress.

This is a topic we have covered before, but given aging demographics with baby boomers, it is coming up more often and increasingly important to address.
 

Here is a summary of some useful strategies to minimize the burden and help with successful transition:

 

  1. Engage with the family:
    • We consider this to be, by far, the most important step in the process, so that everyone is on the same page and communication is open and understood.  Too often, conflicts arise due to lack of communication, as with many things in life.  The sooner families open dialogue, the better.
       
  2. Include cottage/asset succession in your financial plan:
    • If you plan for transition as early as possible, often times, kids are young and it's too early to know if they will want to keep the family cottage or be in a financial position to afford it.  Therefore, financial planning is, by far, the best way to determine the most financially efficient ways to transfer the property and to budget early for the tax implications, so that the option of keeping the cottage is available for the next generation.  Again, the sooner it is planned and budgeted for, the better prepared you will be, as there is no silver bullet.  If you don't have a financial plan, that's another story...contact us and my team can help.

 

Managing the tax bill:
 

  1. Life Insurance
    • This can be one of the best ways ensure there is enough money to cover the tax liability, due upon the death of the parents (current owners).  The bottom line is that the insurance will cost money now and over your lifetime and will need to be budgeted for.  However, the rate of return on the insurance premiums paid, for the death benefit received, is often much better than any reasonable rates of return on that money if it were to be invested in a diversified portfolio, as well as have less risk, and even better, if it can be held in a corporate structure.  Mike Bellamy, our Financial Planner, outlined the math when we covered this topic a couple of years ago on my old website - found here.
       
  2. Gifting the cottage or selling it to your kids, while you're still alive.
    • The advantage is that theoretically there will be a smaller tax bill earlier, assuming the market value rises over time.  Many have tried to reduce the tax bill by selling the cottage to kids a lower than fair-market-value. However, this can be very counter-productive, as it results in double tax.  Gifting can be a better alternative in this scenario.  See here for a full explanation.
       
  3. Transfer to a Trust or a Corporation:
    • These are some of the more complex ways to plan for transition and I will always refer to professionals on these type of tax solutions, again, outlined in Mark's blog linked above.
       

Other tips can include things like tracking all costs of upgrades to the property and building, such as renovations, as this can help to increase your adjusted cost base (ACB), and lower the capital gains tax.

 

There is no perfect solution.  But, it is very important to properly plan for these financial and non-financial issues, in advance, to avoid family conflict and ensure for efficient transition.

 

It all starts with planning.  If we can help you in any way, I encourage you to connect with us and, as always, please pass this along to anyone who may benefit.

 

Sincerely,

 

Dymond Scruton Advisory Group