Spring is here and summer is on the way. If you're like many Canadians, you might be heading to the cottage in the next couple of weeks to put the boat in the water and do some spring cleaning. My cottage is really easy to look after. I can drive to Muskoka and in 12 minutes have the place ready to go. It's called a tent. And it comes with a skylight - a rip in the canvas. That's right - canvas.
Okay, so I don't have the dream cottage yet. It won't be long. And with it will come all the tax and family issues that always accompany cottage ownership. My tent doesn't have those same issues. When I ask my kids who wants my green army tent, I can hear the crickets chirping in the backyard and a pin dropping downstairs. No fights. And when I'm gone, I'm not going to pay any tax on the thing.
Perhaps you're not as fortunate. Maybe you've been saddled with the burden of planning for the succession of your cottage. That's okay. Help is here. You have three primary ways to deal with the cottage: Give it away, sell it to family, or sell it outside the family. Let me talk today about giving it away.
Giving it later
The most common way to deal with the cottage is to simply give it to your kids jointly by way of your will after the second of you and your spouse passes away. This is a simple solution, and can make sense if your kids all equally care about the cottage and are civil enough to figure out a time- and cost-sharing arrangement. There could be tax to pay on the transfer after your death unless your principal residence exemption is used to shelter any capital gain on the cottage from tax. Whether your executor will use the exemption on your cottage or on your city home is a decision that is worth talking to a tax pro about today.
If your family will have a tough time sharing the cottage, it may work best - and don't be afraid to consider this - if just one of the kids ends up owning the place. If you're going to give the cottage to one child, you may want to think about equalizing the inheritances by leaving your other children with other assets or life insurance proceeds. In any event, you should have a discussion with the kids about all this. Don't make assumptions about who may want the cottage and who won't. You don't want hard feelings or resentment after you're gone.
Giving it today
Giving the cottage away during your lifetime to the kids is another option. This will create a tax issue since you'll be deemed to have sold the place at fair market value at the time you transfer ownership. Again, your principal residence exemption may be available to shelter any capital gain, but you'll need to get tax advice on whether you should save your exemption for the city home.
Giving the cottage away today can mean giving up control, which you might not want to do. You could enter into an agreement with your family giving you certain rights related to the property, such as the right to use the place, or a veto over any sale while you're still alive.
Another option to consider is transferring ownership of the cottage today to a non-profit corporation that will own the property for the long-term benefit of your family. Family members would become members of the non-profit corporation, and they'd pay fees as part of their membership. The fees could be used to maintain the property, and any family member who chooses not to be a member doesn't have to pay fees, and won't have a right to use the property. There would be no tax to pay on the sale of the cottage in this case, and the cottage can remain in the non-profit corporation for multiple generations. If the place is ever sold and the cash is distributed to family members, there'd be tax to pay on that income in the hands of those family members.
There could be tax to pay on the transfer of the property to a non-profit corporation, unless you use your principal residence exemption to shelter the gain on the transfer. This idea works best when it's expected that the property will remain in the family for at least two or three more generations without selling the place.
More about this issue next week.