Capital Gains and Passing a Cottage to Your Children

For many families, a summer or winter cottage is a cherished place. Most owners want to keep it in the family for future generations, but this requires careful planning. Without it, legal costs and family disputes can arise. Here, we'll discuss common issues and possible solutions for passing on the cottage. It's important to get legal advice for your specific situation.

BE REALISTIC

Start by asking "what if" questions about the cottage and the next generation:

• Scenario: What if only one child wants the cottage but can't afford to buy out the others?
• Example: Jane loves the cottage, but her siblings don't. She can't buy their shares, leading to disputes.

Start discussing succession early. The next generation might not want the responsibility. If they do, there are ways to handle tax and legal challenges.

MINIMIZE CAPITAL GAINS TAX

Capital gains tax can be a big problem when passing on a cottage. It can lead to a large tax bill or even double taxation:

• Solution: Transfer an undivided interest over several years.
• Example: Parents transfer 10% each year to their children, spreading out the tax.

CONSIDER PROBATE FEES

Leaving the cottage in a will can lead to probate fees:

• Solution: Hold the cottage in joint tenancy.
• Example: Parents own the cottage jointly, so when one dies, the other inherits without probate fees.

CONSIDER A TRUST

Putting the cottage in a trust can save on probate fees and allow for flexible management:

• Example: Parents set up a trust, making it easier to manage and distribute the cottage among children.

CONSIDER A CO-OWNERSHIP AGREEMENT

A co-ownership agreement can help if several children want to share the cottage:

• Example: Siblings agree on cost-sharing, usage, and maintenance, preventing disputes.

CONSIDER JOINT TENANCY OR TENANTS IN COMMON

Decide how children will hold the cottage:

• Joint Tenancy: Surviving children own the cottage after one dies, but the deceased’s estate pays the capital gains tax.
• Example: Three siblings own the cottage. When one dies, the other two own it, but the deceased's estate handles the tax.

Ravinder Makkar

Chartered Professional Accountant

905-791-6666

We professionally assist in following types of Audits:

Corporate tax HST Payroll Networth WSIB Business income v/s Capital gain * Asset Verification, etc.

* The above information is general information, does not apply to all client situations and is situation specific.