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Tell Me, Who Gets The Family Cabin? Understand the impact of transferring a cottage to a child in Canada.






Hello everyone, and welcome to the Retiring Canada Podcast. In today’s episode, we're going to discuss transitioning the family vacation property to the next generation.


Specifically, we will cover:


- Transferring a cottage to a child in Canada

- The importance of starting the succession conversation early

- How the primary residence exemption can be utilized

- The pitfalls of using joint ownership

- The potential for double taxation when selling to your kids

- Strategies to split up the tax bill

- Co-ownership considerations if more than one child wants the property

- Efficient ways to equalize your estate among your kids


For all the links and resources mentioned in today's episode, please check out the link in the show notes or visit retiringcanada.ca.


As a young boy growing up in Saskatchewan, I always cherished the time I spent at the family cabin at Wakaw Lake. And before I go any further... yes, in Saskatchewan, we call them cabins; you may call it a cottage, but here in Saskatchewan, we say it a bit differently. But don’t worry, I will try and keep the Saskatchewan lingo to a minimum. We're not here to debate the superiority of the bunnyhug...


Ok…terrible joke, I know.


Anyway, growing up at the lake is one of the greatest gifts my parents ever afforded my brother and me. I would spend hundreds of hours a year catching perch from the docks of our neighbors, shamelessly walking onto their properties to find the next fishin’ hole. I would fish from sunup to sundown and would only head back home for another handful of sunflower seeds or when my parents put the Canadian flag up at our place—that was my signal it was time to come home.


All those memories made it really difficult in the summer of 2020 when, after 35 years of going to Wakaw Lake, our family decided it was time to move on and sell the cabin. A difficult decision, no doubt, filled with a lot of emotion, both positive and negative, from everyone in the family. Coming to the conclusion to move on and sell 35 years of memories took many hours of family discussion. But in our scenario, it made the most sense for all of us to move on, and as difficult as it felt in the moment, it was the right decision for our family.


I think for all families, cabin succession is a loaded topic, one that stirs up decades of memories that can make coming to a unanimous decision on what to do next seem impossible.


For retirees who are now empty nesters, the cabin may represent your summer home, a place to unwind and enjoy the outdoors. But at some point, the summer home starts to become more and more work during a time when you may be slowing down and wanting to simplify your life. This workload may be offset by the kids if they are engaged and still using the cabin, but what if they tend to be just coming on those sunny, nice long weekends—not when it's time to put the dock in.


If I could share one piece of wisdom from my experience, it's to have the conversation with your family early and often. Preparing emotionally and financially takes time. You are opening yourself up to a lot of family strife if you wait too long to have the discussion. I assure you, it takes time to absorb this type of change for anyone.


Once you and your family have started to make headway on the emotional aspect of the cabin succession—such as who wants it—it's time to start arranging your finances to help streamline the transition and, if possible, minimize the amount of tax paid.


This is where a Certified Financial Planner comes in, working together with your legal and accounting professionals to formulate the best strategy for your scenario.


There will be different planning areas you will want to consider if you are transferring the property during your lifetime or through your will.


First, you’ll want to consider the use of the Principal Residence Exemption to exempt the property from some or all of the capital gains. Many Canadians' vacation properties have grown at a faster pace than their homes, leaving them with a large gain on their cabin or cottage. If this is the case, you’ll want to analyze the tax benefit of applying the exemption to this property. Keep in mind you can only claim the exemption on one property per year, and if you have bought and sold properties in the past, this calculation only gets more complicated.


If this is a strategy you are contemplating during your lifetime or in your final estate, be sure to consult with your financial and tax advisors on how to best use the exemption.


If you are wanting to transfer the property to your children during your lifetime, there are a number of aspects to consider.


One mistake that some property owners make is to try and escape paying tax by transferring the property to their children during their lifetime. The thought is that this type of transfer will avoid tax, when in fact, in the eyes of CRA, this could be considered a taxable event.


If you add a child as a joint owner on the cabin, this is also considered a “deemed disposition” proportionate to the percentage ownership of the cabin. So, assuming you named one child as joint owner, 50/50, from a tax standpoint, half of the cabin would be “deemed disposed of” for tax purposes in the year of transfer and the remaining portion forms part of your estate at death.


In short, you may be triggering tax if you change the cabin over to joint ownership. Furthermore, you are also making the family cabin a marital asset between your child and his or her spouse, opening the risk of a potential claim against a portion of the property in the event of a marital breakdown.


Problems can also arise if selling the property for any amount less than the fair market value. Assuming you paid $250,000 for a cabin and the value is now $500,000. If you sell the cabin to your children for the purchase price of $250,000, you will still be deemed to have received $500,000, of which you will need to pay the capital gain. Your child will now only have a $250,000 cost base, resulting in double taxation when they sell the property.


If you are going to transfer the property during your lifetime, it would be best to gift it or sell it at the fair market value. In both scenarios, you would be responsible for paying the capital gains, and your child or children would assume the property at its fair market value.


If your kids do purchase the property at the fair market value, you may be able to split the taxable gain over five years to spread out the tax liability. This strategy is quite complex as it includes the drafting of sales documents, potential collateral or promissory notes, and more. I won’t get into all of the details on this podcast, so be sure to consult a legal advisor before implementing this type of strategy.


In the case where there are multiple owners, consider the use of co-ownership agreements among the new owners. This document can help to outline the commitments of each child and family involved, along with how any sales disputes would be settled.


Lastly is the use of life insurance to equalize the estate. As a nice easy example, let’s assume you have two adult children. If one child wants the cabin and the other does not, are there assets available in your estate to provide an equal value to the child that didn’t want the cabin? Have the tax considerations on your final estate been factored into your plan?


This is where insurance can play a key role in creating an equal estate and avoiding the need for a “fire sale” in the event your estate didn’t have the liquidity to pay for the tax on the cabin.


Now, as you have probably gathered by now, planning for the succession of a cabin or cottage is a difficult process. But I have to say, as difficult as these financial decisions may seem, getting there emotionally as a family is even more tedious.


If you need help with the heavy lifting on how to start the conversation with your children and lay the framework to structure your finances, our team is here to help.


Alright, so your action items for today’s podcast:


First, it’s time to chat with your spouse and then the kids. Do you and your spouse need the cabin proceeds to be able to retire with confidence? If not, do all the kids want the cabin or just one of them? Would the estate be equally distributed if just one kid gets the cabin? Will they be able to afford the purchase price and ongoing maintenance?


As with most financial decisions I help coach people through, it seems the money side is always much easier to answer than the emotional impact of that decision.


Anyway, the second action item is to start working through the tax implications of these potential scenarios.


If you leave it in the will, is there enough liquidity in the estate to pay the tax on the cabin?

If you gift it during your lifetime, do you have the excess cash to foot the tax bill?

Should you use some or all of the primary residence exemption to negate the tax bill?


And lastly, go enjoy your cabin or cottage!


So much in life can change in an instant. All of the best-laid financial plans don’t mean much at all if you aren't able to enjoy time with family and friends, especially if you are fortunate enough to have a vacation property to call your home away from home.


So, get out there and make some memories with your kids and grandkids!


Alright, that’s all from me today. Thanks for tuning in.


I must say, this was a very difficult podcast for me to record... reminiscing about the family cabin made me well up a bit... kind of wishing I could go back and catch some perch from the dock...


But hey, that’s my wife and I’s long-term goal. We have a young son who we hope one day will be able to experience the same summer magic we felt at the lake growing up.


For more links and resources discussed in today's podcast, please check out the link in the show notes or visit retiringcanada.ca.


If you have a question you would like


me to answer in a future episode, please click the link in the show notes to submit your question, and I will do my best to answer it in a future episode.


And hey, when it comes to your retirement, don’t take chances.


Make a plan so YOU can retire with confidence.


All comments are of a general nature and should not be relied upon as individual advice. The views and opinions expressed in this commentary may not necessarily reflect those of Harbourfront Wealth Management. While every attempt is made to ensure accuracy, facts and figures are not guaranteed, the content is not intended to be a substitute for professional investing or tax advice. Please seek advice from your accountant regarding anything raised in the content of the podcast regarding your Individual tax situation. Always seek the advice of your financial advisor or other qualified financial service provider with any questions you may have regarding your investment planning.  

 

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