May 24th, 2006
Keeping your cottage
From the perspective of cottage owners, especially those who want to keep a cottage in the family, wealth management is an important subject. Do you know for certain what will happen to your cottage when you pass away? What about your other assets? Though this post is specific to Canadian laws, the same principles are worth knowing because they may apply elsewhere.
Quite simply, when you pass away, any assets transferred to your children can result in a capital gains tax, which has to be paid before your children can get the inherited property.
In particular there is a major difference between a cottage and a principal residence, in that the principal residence can be sold tax-free, while the transfer of a family cottage is not tax exempt. Also, if the estate owes money (e.g. tax) then the cottage may need to be sold to pay the money owing.
You should strongly consider selling the cottage to your children while you have the chance. This sets a limit on the tax liability, and the cottage does not have to be sold upon your passing (if the estate owes money). In addition this will avoid probate fees.
If you take the mortgage back from your kids, consider spreading out the payments for at least 5 years. Also, you can make the mortgage interest-free, and forgive the left-over balance in your will so that when you pass away your children will own the cottage without owing any debt.
Another thing to consider is using permanent life insurance to help manage your wealth and estate (obviously this would include any cottages). Creditor protection and tax benefits are just a couple of advantages to permanent life insurance!
By the way, you should never attempt to decrease the capital gain by selling the cottage for a very cheap price. That’s because the CCRA calculates the capital gain based on a fair market value. There’s no way to get around the tax-man in this department.
May 24th, 2006 at 9:36 am
What a great reminder to protect our asstes for our progeny! My husband’s family once owned a cottage on Lake Winnipausaukee in New Hampshire. Way back when it was sold. What a pity for the family. But, we want to start a new tradition. After purchasing a piece of land in Nova Scotia (soon I hope) and retiring for the summers there (alas, as US citizens we can only stay six months during the year, and we’re too old (LOL) to get dual citizenship)we hope our children will hold onto it as a family getaway for generations to come.
May 24th, 2006 at 10:14 pm
Hi again Gerrie!
I think it’s a great idea. To be honest though, I have no idea how your asset (a home in Canada) will be taxed cross-border and how that will work when passing it on to your children. Nevertheless, best of luck to you!
June 14th, 2006 at 8:35 am
Hello-
I am an American citizen married to a Canadian/US citizen living in the US. My father owns a cottage in Mont Tremblant, Que. and he is trying to see the house to me without paying a huge amount of capitol gains. He has owned the property since 1969. I read the article about “Keeping the cottage in the family.” As Americans, can he defer capitol gains for five years, or does he have to be Canadain to do this? He is a landed Immigrant in Canada. Does it make any difference that I am married to a dual citizen?
Does anyone know the answer to these questions?
Thanks,
Michelle
June 14th, 2006 at 11:19 am
Hi Michelle,
Sorry, but off the top of my head I can’t tell you for sure. Probably as a landed immigrant in Canada your father is subject to Canadian CCRA regulations, but you’d better ask an accountant first
Good luck to you!