I’ve been very blessed to grow up having access to a family cottage. Our cottage has been in our family for the past 36 years, and when the day comes to sell it, there will be very few dry eyes amongst us. Our cottage is a first-generation cottage, but I know of families that have had a cottage in their families for four and five generations. When it comes to deciding what to do with the cottage, there are going to be emotional and economic decisions that need to be made.
Over the last few decades, the prices of cottages have skyrocketed. The supply has certainly languished behind the demand, especially within a three-hour radius of Toronto. This poses some interesting challenges to those families that want to hand-down the cottage in order to keep it in the family. The potential capital gains and the emotion around who will be on the deed will inevitably cause a number of heated family discussions.
So What’s at Stake?
Capital Gains will need to be paid upon change of ownership (either within the family or an outside purchaser). Capital gain owed is the difference between the fair market value and the adjusted cost base of the cottage,
Potential emotional repercussions if the cottage is gifted to one of the children or it’s decided to sell on the open market.
Potential hostility amongst the vested parties. As we’ve seen or heard occurring at a will reading, perceived inequality can have a lifetime of rippling effects. It’s best that the parents have a full-disclosure conversation with all vested parties, so it lessens the potential hostility and infighting.
There are a number of options that you can do with the family cottage:
- Gift the Cottage While You are Still Living
This is simplest if the owners choose not to use the cottage anymore. Also, it’s much easier when there is only one child. The problem is, you are signing over the ownership of the cottage, so you better be prepared to live with the consequences.
If you would still like legal access to the cottage, you may want to gift the cottage over several years. This will serve a couple of purposes; you will have access to the cottage for the specified number of years, and you can spread your capital gains taxes over several years, as not to have as profound an impact on your income. This may mean you pay fewer taxes over a greater number of years, and may result in you having your Old Age Security payments clawed back.
By gifting the cottage while the owners are living, all capital gains owing can be paid and accounted for.
The other challenge is, the child being gifted the cottage can turn around and sell it, or it may be considered a marital asset and divided if divorce should occur.
2. Gift the Cottage in your Will
The will can name the heirs of the cottage and the new owner(s). The will can stipulate how the capital gains will be paid, or if an amount was allocated within the will for capital gains.
Alternatively, if the parents want to ensure they are still somewhat in control of the cottage, they can have the cottage owned by a trust. The trust can identify roles and responsibilities, and the trust can allocate expenses for repairs and upkeep of the cottage. Having the cottage owned by a trust, enforces that it can’t be disputed in a bankruptcy or divorce.
3. The Use of Permanent Insurance
The proceeds of insurance can nicely cover the capital gains owed upon deemed disposition of the property. Also, Insurance can be used to equalize the values or amounts received by the children. Parents will often try to be as equitable as possible with the assets. The proceeds of insurance helps to act as a means of equalization amongst family members.
4. Sell the Cottage
Sometimes the simplest and most equitable solution is to just sell the cottage, and with the proceeds, pay off the capital gains tax owing, any relevant expenses, and then the balance can be divided equally amongst the parties. The sentiment over keeping the cottage in the family may be lost, but there will be no dispute over fairness and values.
A cottage is a place that holds tremendous memories for kids, and if you can’t continue to build new memories, perhaps you can use the proceeds from the sale of the cottage, and buy a new cottage.
Chris Coulter is the Founder and President of The Finish Line Group. He works with business owners to leverage their businesses to increase their wealth, reduce corporate and personal taxes, create viable succession strategies, enable employee retention strategies and allow them to exit their businesses on their terms.
Chris’ passion for what he does evolve from the mistakes he made in his first business; by not diversifying his risk and not utilizing a lot of the opportunities within his business to create significant wealth. Chris found out the difficult way and now educates business owners on how to avoid many of his former oversights and ultimately control where their finish line ends.