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MONEY MATTERS
PASSING ON THE COTTAGE
– By Christine Van Cauwenberghe
When passing the family cottage onto their children , the big question is , “ Where do I start ?”
First , determine when you think you might want to pass on the property . If you intend to use your vacation home throughout your retirement , it ’ s best to wait until your spouse passes away before transferring the property . Unfortunately , many rush into passing on their property , hastily adding their children as joint owners without considering critical scenarios such as :
• What if a child gets separated or divorced from their spouse ?
• What if a child goes bankrupt ?
• What if you wanted to sell or mortgage the property and one of the new joint owners refused to consent ?
Generally , it is not advisable to add additional owners into the title . Although some families decide to add a joint owner to avoid paying probate fees , these fees are actually quite low ( approximately 1.5 % in Ontario ) and generally not worth the risk of losing control of the property . If you adamantly want to add a child as a joint owner , contact an estate lawyer who can structure a deal that makes the new “ owner ” a trustee of the property . This will ensure that the property continues to be “ beneficially ” owned by the parents until the time of their death and distributed as part of their estate .
Assuming you want to wait to transfer your property at
Léony deGraaf Hastings , CFP , EPC
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905-632 632-9900 www . dgfs . ca the time of your death , sit down with your children and see who might be interested in taking over responsibility for the vacation home , including who may use it and when , how much will be contributed on an annual basis for repairs , and what sort of major renovations should be done , so try to avoid that route . In a best case scenario , only one child will be interested in keeping the property . But if some of your children want to co-own the family cottage , they should first negotiate a co-ownership usage agreement , which outlines what will happen when one owner dies or gets divorced , and how to resolve disagreements about usage and maintenance among other things .
The next question will then be , how to pay for it . In most cases , the child will buy the property by using their inheritance proceeds . But what if their inheritance is worth less than the value of the cottage ? For example , what if your combined estate , including your home , cottage and investments is worth $ 2 million , with the cottage being worth $ 600,000 ? After capital gains taxes and other expected tax on your registered retirement savings plan or investment funds , the after-tax value of your estate could be reduced to $ 1.5 million . If you have three children , this means they will each receive $ 500,000 . If one of them wants to inherit the $ 600,000 cottage , that child will have to come up with $ 100,000 more to buy their siblings out . If the gap is too significant for the child to manage , you may need insurance to cover the amount . The sooner you plan , the lower the insurance cost .
If none of your children are interested in taking over the cottage , then you only need to decide when to sell it . One option may be to designate the property as your principal residence for the principal residence exemption , but you won ’ t be able to do that until your property is sold . Whatever the situation , your executor should work with a tax advisor to ensure that your estate won ’ t pay unnecessary taxes . Keep in mind that the capital gains tax is completely separate from probate fees . Do not assume that adding a child as a joint owner will help avoid capital gains tax .•
Christine is a tax and estate lawyer for Investors Group Financial Services Inc . She specializes in structuring estate plans in the most tax-effective and practical manner .
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