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Keeping the Cottage in the Family

cottage

Owning a cottage provides a getaway, a place where friends and family can gather far from the hustle and bustle of everyday life. When the time comes to figure out what will become of it after you die or are no longer able to use, family bliss can very quickly transform into worry or outright war.

If the parent’s wish is to have all the kids share the property, the resulting financial inequity can wreak havoc with the family if one of the children can’t afford to buy out their siblings during the estate distribution process. Even if money isn’t an issue, disagreements can arise over who is responsible for maintenance and improvements. A successful succession plan needs to be devised ahead of time.

The simple solution: might be to sell the cottage, either during one’s lifetime or stipulating this in your will. However, if the cottage is to remain in the family, a successful solution usually can be found, as long as specific factors are properly addressed.  Address key issues such as; when should the ownership be transferred, how it is to be valued, how will the resulting capital­ gains tax be paid, can you use CRA’s principal­ residence exemption, and more complex solutions such as shared­ or trust ownership agreements.

Discuss the issues:  Start a discussion with family members well before being forced into making a decision will allow everyone to understand the time and financial commitment, ­­and reveal who actually might be interested in it.

Decide on ownership structure: If only one child wants the cottage this could be simple. If there are sufficient assets in the estate, ensure all children receive their fair share. However, if several children are interested ­­and in similar financial positions ­­it may make sense to develop an ownership agreement, or set up a trust. This can be done in one’s will, or form part of a sale agreement if the property is transferred while one is still alive. It should stipulate who pays the property taxes and maintenance costs etc. It should also specify how the surviving co-owners are to buy out the deceased child’s share if one of the children dies.

Setting up a trust may make sense for a valuable property: If you decide to set up a trust, a trustee would manage the property on behalf of the beneficiaries, typically your children or grandchildren.

Remember Capital­-Gains tax: Once it has been agreed on who will take over the property, the next challenge is dealing with the capital­-gains tax that is likely to be payable when the property is transferred. The amount of tax is based on the property’s fair market value, so gifting will still incur tax.  The capital gain is based on the purchase price and what the assessed current fair market value is. The difference minus the cost of qualified improvements is the capital gain which is taxed at 50% of the gain at the top marginal rate at the time.

Use the principal ­residence exemption: A cottage can qualify as one’s principal residence if, as the taxation rules state, as long as it has been ordinarily inhabited by the owner or family member. The bottom line is, don’t wait until mom and dad pass away and the children are forced to decide what to do with the cottage.  Get some financial and legal advice ahead of time and maintain harmony in the family!
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