A family cottage passed down from previous generations is a very special thing. The memories, the history, the various transformations over the decades…it’s nice to keep it in the family whenever possible. However, transferring ownership of property isn’t like giving someone a nice watch or a used car; there are specific laws (and taxes!) involved. If you’re thinking of giving the kids the cottage, be sure you know what’s involved for all parties:
Make sure everyone’s onboard
This may come as a surprise, but there’s a chance your kids or grandkids won’t be interested in the family cottage. If it’s too long a drive, if it needs a lot of work, or if they just aren’t able to manage the bills or the upkeep it’s better you learn now than after taking steps to sign it over to them. The best advice is to hold a family meeting and find out who’s in and who’s not and discuss options for the cottage succession and your estate plan. You may find that instead of passing it down to them, you’ll rent it out or put it on the market.
The taxman cometh
There’s no avoiding paying capital gains taxes in Canada when you transfer or sell an asset such as a second (or subsequent) property unless it’s decreased in value since you bought it. When it’s transferred, the government views it as being sold at ‘fair market value’, and you’ll have to pay capital gains taxes. For example, if you and your spouse bought your cottage for $300,000, didn’t put much work into it, and it’s now worth $800,000, that’s a capital gain of $500,000, of which you will be taxed approximately $130,000 – $150,000, depending on your income and other tax considerations. That’s a lot of money to pay for a gift you want to give someone!
If you don’t transfer ownership and keep the cottage in your name, your children will still be on the hook to pay the capital gains tax when you pass away.
Knowing your options
If you know you want to transfer ownership of the cottage sooner than later, there are a few options for you to ponder:
One is that you work out a payment plan with your children to help pay down the cost of the capital gains taxes. Another is to make the cottage your principal residence, which means you’d be eligible for the principal residence exemption, but be sure you understand the implication and reporting processes if taking this step. A third option is to consider the benefits of the ‘capital gains reserve’, which essentially allows Canadians to stretch out their reporting of the capital gain for up to five years, but only if the cottage is reported as being sold and not gifted (or transferred). In other words, you would not have to pay the full tax amount at once, and it would be more manageable to pay over a longer period. All of these options naturally have strict tax rules and legal implications, so be sure to work closely with your real estate lawyer and/or accountant before making your decision.
Finally, whatever your decisions about your beloved cottage make sure you have a legal will. Don’t let your hard-earned and cherished assets like a family cottage go into the wrong hands, or get tied up in legal battles. Have that family discussion, research your options from a financial, legal and personal standpoint, then make a plan of action and put it in your will. The best way to tackle your cottage succession plan is to work with a legal team that specializes in real estate law. At Ares Law, we’re here to help you every step of the way; make an appointment by calling (705) 645–8743 and let’s get started.
