We continue with our theme of dealing with the planning process of passing on the family cottage. We looked at considerations that might be important around which family members, what is the right time and what are the tax implications.
One of the first and most important steps in this journey is to have an open discussion with family members. This will lay the groundwork as you consider strategies, along with your personal advisors, that will help make the transition of the cottage a smooth process.
Transition strategies for the cottage
1. Give the cottage as a gift and transfer title
We mentioned this earlier, and this can be the simplest solution. Are you ready to give up control of the cottage yet, and do the recipients have the funds to maintain the property?
Gifting the cottage while you are living will avoid probate costs and any future capital gains will now be tied to the new owners.
However, you should be prepared to pay tax now on the current capital gains that might exist, along with land transfer tax. Consider you have lost control of the cottage and a potential source of capital if you require funds in the future. Also, if you have children that don’t participate, are there sufficient assets to treat them fairly when planning for your estate?
2. Sell the cottage to a family member(s)
You might wish to sell the cottage to one or more family members at an agreed-upon price. Again, you give up control and can the new owners maintain the property?
You get to establish the price between you and your family, there are no probate fees, and you get the proceeds of the sale that might be needed to help maintain your retirement.
Remember that capital gains will be applied to the fair market value and not the price you may have sold it for. Consider your tax situation; do you have any current or potential capital losses that could help offset a capital gain? Be prepared to pay tax on capital gains, land transfer tax, and the potential for a reduction in your OAS benefit depending on the gain when you sell.
3. Transfer the title into joint tenancy
One option is to transfer title so that you and the recipient(s) are co-owners. You share control of the cottage and your survivors will inherit the full ownership.
This will avoid probate fees and you can still benefit from any future gain in value. However, you will still have to deal with a portion of any capital gains and the fees associated with the transfer. Also, the cottage could be subject to any creditor claims against the new owners. In this situation, you might be forced to sell the cottage to meet the claims.