Jeff Halpern says that buying a family cottage was always a dream of his. He imagined uninterrupted time with nature and his family, and it hasn’t disappointed. He calls his cottage on the shore of Lake Simcoe, an hour north of Toronto, his “place of happiness.”
They were a family of five when they bought it more than 20 years ago. But fast forward to today, his daughters have husbands and kids of their own, and cramming 12 people into a traditional bungalow-style cottage all at the same time is proving to have some challenges.
Halpern may not have envisioned the logistical problems of three generations sharing a single cottage, but he did foresee the financial issues that can present themselves when it passes to the next generation.
“I was concerned with the rise in the value of the cottage,” says Halpern, a Business Succession Planner with TD Wealth, “and the tax implications of death.”
Halpern is referring to the potential capital gains tax that would become due when the property passes on to his children. Often cottages and the land they sit on appreciate significantly over time, and if you don’t plan accordingly it could mean the next generation can’t afford to hold on to it.
Being a planner and tax professional, he knew that early planning was imperative, so he elected to place the cottage in a Trust. “When I completed the purchase, I instructed the lawyer to create a Trust for the property ownership, which would permit the property to be transferred to the children at the cost-base of the Trust.”
There are other ways to pass down the cottage efficiently, and Halpern offers up these considerations when you buy a cottage, anytime after your purchase, or in your estate plans.
At the time of purchase
Halpern chose to enact a Trust for his cottage. Through a Cottage Trust, parents might be able to transfer ownership of a cottage to other trustees, such as children or grandchildren. There are other types of Trusts as well that may aid in passing down the cottage. Halpern cautions that Trusts are complex and should be undertaken with good legal and professional guidance.
Without a Trust, cottage owners could add other names to the ownership of the cottage at the time of purchase, however this means that the cottage could be fair game for any of your children’s (and their spouse’s) creditors.
Purchasing life insurance to cover the capital gains tax when it comes due may also be an effective way to help ensure the cottage stays in the family.
Adding names to the cottage ownership down the road is a possibility, but you could trigger a “deemed disposition” of the property at fair market value. When there is a capital gain, a tax bill usually comes with it. In some cases, it may still be preferable to settle the taxes now, rather than watch the value — and tax liability — grow.
It’s also possible to sell your principal residence to a child who doesn’t own one, and then make your cottage your principal residence going forward. This way, says Halpern, the cottage can pass on tax-free when you die.
In your Will
Halpern suggests leaving a sum of cash to cover taxes as well as a period of maintenance and expenses. You can include a provision for your children to decide whether to opt in or opt out of cottage ownership, says Halpern, since plans change, children move, and some would maybe prefer a condo in Cabo San Lucas.
Halpern says that this year his family will try out a rotational schedule so that everyone has time and space to enjoy the cottage. He is also encouraging them to consider a co-ownership agreement to help them deal with future decisions involving the cottage, including disputes, cost sharing, death, divorce or potential sale.