Cottage succession planning - Strategies.

1. Personal Article Comprehensive Comprehensive
Personal Article
Cottage Succession Planning
Prepared by the Investors Group Advanced Financial Planning Team
For many families, preserving the there will be tax owing before the would be in the year of death).
family cottage is much more impor- assets can be transferred to the next At that point in time, you (or your
tant than preserving any other family generation. The danger in failing to executor/liquidator) should speak
asset. This is because the cottage may do estate planning is that you may with your financial and tax advisors
evoke fond memories and emotional need to sell some of the estate’s to determine how to use the principal
family ties. Many people want to be assets (including the cottage) in residence exemption to your best
able to leave the cottage to their chil- order to pay the tax. advantage.
dren, but do not plan for the tax con-
sequences and family disputes which Principal Residence Exemption Preserving the Adjusted Cost Base
may arise at the time of their death. One possible way to reduce the tax Another option for minimizing the
The concepts discussed in this article liability is to designate the cottage as taxable capital gain is to ensure that
apply equally to any vacation property your principal residence for tax pur- all additions to the adjusted cost base
you may own, including a ski chalet poses, and thus exempt some or all or “ACB” of the property are fully
or condo. of the capital gains on the disposition accounted for. This is important
of the cottage from taxation. However, because capital gains are calculated
Tax Liability at the families can only designate one resi- by subtracting the ACB of the proper-
Time of Death dence as their principal residence for ty from its fair market value, so the
The first hurdle to overcome when any given year. If you have owned higher the ACB of the property, the
ED MADRO B.A. Econ., CPCA
leaving a cottage to your children is more than one personal-use property lower the gain which must be recog-
Consultant
edward.madro@investorsgroup.com to make sure that there are sufficient during the same period of time, then nized. The ACB of the cottage is not
(403) 220-9654 funds in your estate to pay any tax the calculation of the principal resi- just the amount you initially paid for
liability which may arise at the time dence exemption can become quite it - many people pour thousands of
1-866-424-6392 of your death. Many individuals do complicated. For example, if you have dollars of capital improvements into
not realize that the increase in value owned the family cottage for the last their cottages over the years, thereby
of their cottage since the time it was 20 years, but during that same 20 increasing the ACB. However, the
purchased may result in a tax liability years you have bought and sold sever- ACB is not increased by sweat equity,
for their estate. This is because upon al “city homes” and exempted the only out-of-pocket expenditures. You
death, there is a “deemed disposition” gains on the sales of those city should keep the receipts for the
of all of a person’s assets, unless the homes, you will not be able to shelter improvements that have been made
assets are transferred to your spouse the entire gain on your cottage. in order to justify these costs in the
or common-law partner. A deemed event you are (or your estate is) audit-
You do not have to designate a prop-
disposition means that all of your ed by the Canada Revenue Agency or
erty as your principal residence until
assets are deemed to be disposed of Revenu Québec.
you actually sell the property or you
for fair market value. Therefore,
are deemed to have sold it (as you
upon the death of the last spouse,
This report specifically written and published by Investors Group is intended as a general source of information only, and is not intended as
a solicitation to buy or sell specific investments, nor is it intended to provide tax, legal or investment advice. Clients should discuss their
situation with their Investors Group Consultant for advice based on their specific circumstances. Insurance products and services offered continued on next page
through I.G. Insurance Services Inc. (in Quebec, a financial services firm). Insurance license sponsored by The Great-West Life Assurance
Company (outside of Quebec).
™Trademark owned by IGM Financial Inc. and licensed to its subsidiary corporations. Investors Group Financial Services Inc.
“Cottage Succession Planning” ©2009 Investors Group Inc. (02/2009) MP1312

2. Comprehensive Personal Article Personal Article Comprehensive
continued from previous page
Many cottage owners also had their a “fire sale” of the family cottage at “trustee”, and does not actually have If you choose to sell it for fair market you are there, but if they live in the agreement will be there long
properties appraised in order to use the time of your death. In any event, an ownership interest in the cottage). value, ask your legal advisor if it another province, or are not interest- before there are any arguments.
the $100,000 lifetime capital gains it will be important to have this con- The only advantage to transferring would be beneficial to structure the ed in maintaining the cottage them- Once the parties start to disagree,
exemption which was eliminated for versation sooner rather than later, part or complete ownership during sale documents so that only 20% of selves, you may be surprised to learn negotiating a co-ownership agree-
real property in 1992. In order to since delaying the conversation too your lifetime is that the amount of the purchase price is payable in any that they do not want to keep the cot- ment will become next to impossible.
claim the exemption, an election long could result in the life insurance the gain taxable in the hands of the one year, allowing the capital gain to tage after you are gone. Discussing The co-ownership agreement should
would have been made on your tax option no longer being available (due parents is “capped” at the time of the be spread out over 5 years, as this issue with your children can help also specify how the parties can be
return by the 1994 deadline or such to age or poor health). gift or sale. However, life insurance opposed to 100% being taxable in the to alleviate disagreements after the bought out in case of disagreement
extended date as allowed at the time will not be an option for paying this year of sale. However, if you are not time of your death. and what happens upon the death of
(all allowable extensions have now Gifting During Your Lifetime tax, and the tax deferral in the hands receiving the entire sale price imme- one of the siblings – will it go to the
passed). If you made such an elec- One mistake that some cottage own- of the parents is lost. diately, you may wish to take security Equalizing the Estate with Insurance grandchildren? Or does it go to the
tion, be sure to keep copies of the ers make is to try and escape paying against the cottage in the event future If one or two of your children wants surviving children only? Can it pass
tax by transferring the cottage to their Problems can also arise if you sell the the cottage, but some do not, the
relevant documentation and the tax payments are not made as promised. to a son- or daughter-in-law? It is best
children during their lifetime. These cottage to your children for anything issue may become how to equalize
return on which you made the elec- If you do not intend to collect pay- to resolve these issues sooner rather
individuals assume that if they trans- other than fair market value. If you the estate. If the cottage will form a
tion so that the capital gain reported ment from your children, consider than later.
fer the cottage to their children now, purchased the cottage for $50,000, large part of your estate, insurance
by your estate is accurate. forgiving the debt in your will, but
then no tax will be payable. and then sell it to your children for may help fill the gap for the other It is important to plan for how the
include it for the purposes of dividing
Planning with Insurance Unfortunately, this is not the case, as that same amount at a time when the children. Again, if you are not inter- cottage will be passed to the next gen-
the estate, so that your other children
If you know that your estate will have the Canada Revenue Agency and fair market value is $100,000, you ested in paying the insurance premi- eration long before it actually hap-
receive assets of similar value.
to pay a substantial capital gain tax Revenu Québec will deem the proper- will be deemed to receive $100,000, ums, do not rule out the possibility pens. Visit your Investors Group
upon your death, and you do not ty to have been sold for fair market and you will have to pay tax on the Another concern with transferring a that your children may be willing to Consultant to learn more about the
have any other way to minimize it, value at the time it is transferred to capital gain. However, your children cottage property to a child is the fact pay the premiums, if the insurance issues relevant to cottage planning,
you will need to find a way to fund the children, potentially triggering an will only be deemed to have a cost that you will lose control over that policy will be the solution to keeping and how to prevent family disputes
this liability, or risk the sale of the immediate capital gain. If you do not base of $50,000, resulting in double asset. This can be problematic in the the property. or unexpected tax bills.
cottage in order to pay the tax bill. transfer complete ownership of the taxation when they sell the cottage. If event your child suffers a marriage
If your estate has sufficient liquid cottage, but instead add a joint owner you want to transfer the cottage to breakdown, or has creditor issues. Planning for Multiple Owners
assets, this may not be a problem, or owners, then there is a disposition your children during your lifetime, Think carefully before giving up If several children want the cottage,
but it is sometimes difficult to guar- of a proportionate amount of the gain the best options are to either gift it, or control of a major asset such as a then you need to consider a co-own-
antee that there will be a sufficient when an additional owner is added sell it for fair market value. If you cottage. ership agreement. There should be
amount left in the estate, particularly (e.g. if a sole parent is currently the give the asset to your children, you something in writing setting out how
will still be deemed to have received Succession Issues
if you incur significant long term owner, and that parent adds two chil- the cottage will be used, who will pay
care costs. Life insurance is usually fair market value for it, which may There are also non-tax issues to con- for it, and who will be responsible for
dren as joint owners, then two-thirds
the solution used to ensure that there result in a capital gains tax liability, sider. Do you even know which, if its upkeep. One idea may be to have
of the gain is triggered now, with the
will be sufficient funds to pay the tax but your children will be deemed to any, of your children wants the cot- the children sign a co-ownership
remaining one-third triggered at the
liability. Even if you can’t afford it, have paid fair market value, so there tage? Your children may be interested agreement as a condition to inherit-
time of the parent’s death, although
your children may be willing to pay will not be double taxation when they in coming to the cottage as long as ing a part of the cottage. In that way
in some cases it may be possible to
the premiums if it means preventing argue that the new owner is simply a sell the property.