What you can do now to ensure a smooth transition later
By Vicki Schmolka
Warmer weather has many individuals thinking of their home away from home. There’s nothing quite like sitting on the dock of the bay watching the water for loons. A family’s vacation home is often a cherished retreat, filled with wonderful memories of happy times, peace and pleasure. That is until the cottage passes on to the next generation. During this transition, family dynamics, money issues and different lifestyles threaten to rip a family apart.
Legacy coach, Heather Decloux, owner of Kingston-based Koru Mediation, has witnessed this unfortunate demise. Christine Van Cauwenberghe, assistant vice-president, tax and estate planning, with Investors Group, agrees, stating “bitterness and resentment” can replace harmony when it comes to passing on a vacation property.
Usually, money plays a part.“It is really expensive to own and operate a cottage,”notes Heather, adding that money “may not be the biggest factor” in cottage conflicts. Sometimes, it is more about “who did more work the last time they were there.” Siblings may have more trouble sorting things out without their parents around. And sometimes, cottage succession arrangements seem to favour one child over another.
No one wants their legacy to be a fractured family. So what can parents do to keep a vacation property in the family and stop it from straining relationships after they are gone?
Experts agree that investing in professional advice and having a Will are essential steps to making sure your wishes can be put into effect and your estate can be sorted out efficiently. Mary-Alice Thompson, a Wills and estates lawyer with Kingston’s Cunningham Swan, says her practice is kept busy disentangling “messes people get into because they did nothing.”
While all advise on the importance of a Will, Christine warns it is a mistake to get a Will from the Internet. “If you want to cause your family a lot of grief, go online to get a Will.”
There are a lot of factors to take into account besides family feelings. Usually, there’s capital gains taxes to pay when the next generation inherits a vacation property. When a property has been in the family for some time, the amount the property is now worth can be substantially more than its purchase price. Capital gains tax is calculated on this increase in value. Taxes can be a big debt for the estate to pay, and can sometimes necessitate the sale of the vacation property. That’s why some people carry life insurance to help their families cover capital gains taxes and other estate costs.
There are many ways to reduce the tax impact when a vacation property passes to the next generation. Here are a few possibilities:
• Keep all of your receipts for capital improvements to the property, such as a new deck or septic system. These costs can be added to the purchase price of the cottage to reduce the capital gain.
• Designate your cottage as your principal residence. No capital gains taxes are owing when a principal residence changes hands. You have to live in the cottage for a significant portion of the year, and when it becomes your principal residence, your other home loses that status, so capital gains taxes will be owing. An accountant or lawyer can compare the tax benefits and explain how to meet the Income Tax Act requirements.
• Give your vacation property to your children now and pay the capital gains tax yourself so it is not a burden to the estate.
• Sell the property to your children with a mortgage you hold, spreading the capital gain over a few years.
• Consider putting a conservation easement on the property or giving a portion of it to a land trust.
What is a land trust?
Land trusts conserve land for nature for the long-term. When you own significant shoreline or a large property, a land trust may be interested in accepting the non- cottage portion of the property as a gift, or holding a conservation easement on the property. Separating the nature area from the cottage area and giving the nature segment to a land trust can generate a large charitable receipt. It may also reduce property taxes. For the family, the donated land is no longer theirs, but will remain a natural area buffering the cottage property forever.
Ownership does not change hands when a landowner donates a conservation easement to a land trust.The easement is negotiated between the land trust and the owner and then registered on the property title. It restricts activities on the land, such as future building or logging, and gives the land trust the right to come on the property to monitor compliance with the conservation easement agreement. The landowner receives a charitable receipt for the value of the conservation easement.
When a donation of land or of a conservation easement to a land trust is designated an ecological gift under Environment Canada’s program, there are additional benefits to the landowner.The charitable receipt can be spread over a 10-year period, instead of the usual five, and no capital gains are attributed to the transaction.
Paul Mackenzie, chair of the Land Conservancy for Kingston, Frontenac, Lennox and Addington’s Land Acquisition Committee, has found “people who donate property to land trusts have grown to love their land and want to leave a legacy to nature.”
With all of these options for cottage owners, Heather advises it is best to “start by having a conversation.”What’s important to the owner? Who is interested in taking on the cottage? She suggests thinking carefully about whom to include in discussions. When everyone feels heard, there’s less chance of hard feelings and more chance of a lasting arrangement that will keep the cottage in the family and the family together. Legacy coaches can help families conduct productive conversations, avoiding costly conflicts and family fights. ■
Vicki Schmolka is president of Land Conservancy for Kingston, Frontenac, Lennox and Addington.
NOTE TO READERS: THE VIEWS OF THE AUTHOR DO NOT NECESSARILY REFLECT THOSE OF COYLE PUBLISHING. THIS ARTICLE IS PROVIDED AS A GENERAL SOURCE OF INFORMATION ONLY AND SHOULD NOT BE CONSIDERED TO BE LEGAL ADVICE. READERS SHOULD CONSULT WITH THEIR FINANCIAL OR LEGAL ADVISOR TO ENSURE IT IS SUITABLE FOR THEIR CIRCUMSTANCES.
Two mistakes to avoid
When you sell the cottage to a child for a nominal amount, e.g. $1,000, you double the tax load.You will pay capital gains tax as if the property had been sold at fair market value. The purchaser will eventually pay capital gains tax based on the increase in value from the purchase price of $1,000.
When you divide your property without thinking about the tax consequences, you may create hardship for some and unintentionally benefit others. Let’s say you have three children and you leave one the cottage, worth $300,000; another the $300,000 in your Registered Retirement Savings Plan (RRSP); and the third receives $300,000 in stocks.The estate will have to pay taxes on the capital gain on the cottage and stocks, and include the value of the RRSP in the estate tax return. It may not turn out to be so fair after all.