Inheriting a property as a result of a loved-one’s death is very emotional and exhausting. The situation requires understanding on how it works legally and what the process is. On top of dealing with the loss and grieving, if you do inherit the family cottage, or you currently own one and are thinking about passing it down, there are several fine points to know concerning our Canadian laws. Let’s check out a few here:
Do I have to pay a fee?
Unfortunately, the truth is yes. In Canada, second homes, cottages and any other vacation property are all taxable assets. In Ontario, passing down a vacation property to a beneficiary will mean probate fees (a.k.a. Estate Administration Tax) which are roughly 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. So the beneficiary who receives this property will encounter a significant financial hit.
Capital Gains tax…what is that?
Almost always, vacation properties increase in value over time. When this happens the owners have to contend with what’s known as a Canadian Capital Gains Tax. If the transfer of property over to you the beneficiary, is too great a cost and you can’t afford, then you can always decide to sell. However, when you sell, the profit you make is known as Capital Gain. You would pay tax on that amount. Let’s say your parents bought the cottage for say $60,000 back in 1974, and it’s now been appraised at $200,000, your capital gain would be the difference of $180,000. You get taxed on that amount, which would be 50% of this gain at your marginal tax rate.
Suggestions on what to do first?
The best thing to do first, aside from speaking with a real estate lawyer, is to get an appraisal done on the property and locate any of the original records. The appraisal will give you an accurate idea of the properties worth now. Once you understand the fees and taxes involved with the property, you can then figure out if you want to keep the cottage or if you need to sell it.
There are a number of things to think about when considering passing along ownership of the family cottage. You should decide on if it will be used by the entire family? Will the upkeep and maintenance be divided up equally between the beneficiaries? Can the regular maintenance like the dock, the septic system, road access and other fees, be affordable for the person you’re leaving it to? Without proper planning, a beneficiary who receives a family cottage may not have the means to maintain it therefore inviting a host of problems for them to deal with…on top of everything else.
If you are contemplating passing down your family vacation home, or if you know you are going to inherit one in the future, connect with us, Ares Law in Parry Sound. You can rest assured that as experienced real estate lawyers, we know a thing or two about buying and selling cottages, as well as succession planning and wills. It’s our job to make sure that nothing is missed and that your interests are always protected. Contact us to learn more about the services we offer and how we can help; call us today at (705) 746-6444.
