Is there a cottage that’s been in your family for years and you’re eager knowing that one day it might be yours…when the time comes of course? Although inheriting a property as a result of a loved-one’s death is often very emotional and exhausting, it’s important to understand how it works and what the process is. If you do inherit the family cottage, or you currently own one and are thinking about passing it down, there are several intricacies within our Canadian laws you should know. Let’s go over the basics here:
Are there any fees I have to pay?
The unhappy truth: Second homes, cottages and any other vacation properties are indeed taxable assets. The increase in value on the second property (or in this case, a cottage) is taxed, so the beneficiary who receives may encounter a significant financial hit. In Ontario, passing along a vacation property to beneficiary will mean probate fees (a.k.a. Estate Administration Tax) which are approximately 1.5% of the value of the property. So, if the property is now valued at $1 million, then the probate fee/tax would be $15,000.
What is capital gains tax?
When vacation properties increase in value over time, which is almost always the case, owners have to contend with Canadian Capital Gains Tax. If the transfer of property is too much for you to afford, there is always the decision to sell. When you sell, the profit you make is known as Capital Gain. If your parents bought the cottage for say $60,000 back in the day, and it’s now appraised at $200,000, your capital gain would be the difference of $180,000. You would then be taxed on that amount which would be 50% of this gain at your marginal tax rate.
What should I do first?
First and foremost, get an appraisal done on the property and gather up any and all of the older records. Having this information handy about the value of the property when you take possession will be helpful. Once you understand the fees and taxes involved moving forward, you can then decide if you wish to keep the family cottage going, or sell it.
As you can see, there are a number of things to factor in when considering passing along ownership of the family cottage. Will it be used by the entire family? Will the maintenance and upkeep be divided up between siblings? Can you afford to maintain the docks, septic, road access and well? Without proper planning, leaving the family cottage to a beneficiary who can’t afford their share of costs invites a host of future problems.
When thinking about passing down your family vacation home, or if you are going to inherit one down the road, connect with Ares Law. You can trust that as experienced lawyers right in the heart of cottage country, we know a thing or two about buying and selling cottages, as well as succession planning and wills. It’s our job to ensure that nothing is missed and that your best interests are always protected. Contact us to learn more about the services we offer and how we can help; call us today at (705) 645-8743.
