Peter Lillico has been practising law for more than three decades. He describes his hometown of Peterborough, Ontario, as the "heart of cottage country" so it's no surprise that one of his specialties is cottage succession planning. Mr. Lillico, of Lillico Bazuk Kent Galloway, also focuses on trusts, wills, estate planning and estate administration.
Finding a way to is tricky, in part because it is such an emotional asset, Mr. Lillico said. In addition to the complex tax issues, a cottage agreement is an essential step in the planning process.
"The parents need to try to create a legacy of love, and not just hand over a hot potato," he said. ""This can work but the chances of that quadruple if the parents actually have a plan other than just dying and leaving it in their will to be split equally among the three kids, whom they assume will get along."
Peter writes regularly on various legal topics for several publications, including Cottage Life and Good Times magazines. He has developed and teaches law courses at Trent University, St. Clair College and Sir Sandford Fleming College, and frequently presents seminars on estate planning. His first book, on estate planning for small business owners, is slated to be published this year.
In his spare time he is a licensed display fireworks supervisor and solemnizes marriages as a Humanist Officiant.
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Roma Luciw, Globe Investor: Hi Peter. Thanks for joining us. Judging by the amount of questions pouring in, this certainly seems to be a hot topic - and an emotional one - among our readers. Lets dive right in.
Stan Duptal writes: At 70, my wife and I getting a divorce. She will list her principal residence as the cottage. I will list our home as mine. Both will be passed on tax free.
Peter Lillico replies: Hello Stan. From 2009 forward, you and your wife can treat the house as your principal residence and the cottage as her principal residence. This will exempt all future gains on both properties from taxation. However, for the period of time from the date of acquisition of the cottage and house to 2009, only one principal residence exemption is available. The pre-existing capital gains liability does not retroactively vanish upon a property becoming a principal residence. Your wife and you and your lawyers will have to take this into account.
Shaun McDonnell asks: As our cottage has appreciated more than our house and by default, the capital gains would be greater on the disposition of the cottage. Should I consider claiming our cottage as our principal residence? If so, when would I elect to claim it as our principal residence, on the deemed disposition of our house?
Peter Lillico replies: Shaun, you should certainly consider allocating your principal residence exemption to the cottage. You only have one principal residence "card" and so you want to use it to exempt the maximum possible tax liability. You must make your decision to use the exemption on the disposition (sale or gift) of either the cottage or the house. The good news is that you have until April 30th of the year following the disposition of one property to make your decision, so there should be lots of time to determine how best to use the principal residence exemption.
Also, the fact that your cottage has increased in value more than the house does not "by default" mean that it has a greater taxable capital gain. Don't forget the value of capital improvements that affect this calculation. If for example you built a $75,000 boathouse, replaced the roof for $5,000 and put in a new septic system for $10,000 - all of those capital improvements increase the cottage's cost base and so reduce the capital gains tax liability.
Michael Laroche asks: After the parents pass it to the children, in this case as a joint tenancy, what is the best course of action for those aging owners for their children?
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