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The family cottage: Tips for succession planning

Your family has always had a great time at your cottage so it’s natural to assume you’ll be handing it off to them after you’re gone. But if you don’t ask your adult children what they really want and plan for the tax consequences, that may not happen.

Unless you’re passing assets to a spouse, when you die you are deemed to have disposed of your capital assets at fair market value. This means if your cottage property has appreciated in value, your estate will face a significant capital gains tax liability. Remember you have the benefit of a principal residence tax exemption, which can be applied to just one property at a time, and that can be either your cottage or your home. The one you don’tchoose will be subject to tax on its increased value.

There will be tax consequences if you leave the property to your children in your will – so make sure there will be sufficient funds in your estate to pay any tax liabilities. Life insurance can be a good strategy for covering the capital gains on your cottage. The death benefits are usually tax-free and can be used as a ready source of cash to avoid a forced sale, to pay capital gains taxes, or to equalize your estate among all your inheritors.

Trying to escape paying tax by transferring your cottage to your children during your lifetime won’t work. It will trigger an immediate capital gain at the fair market value of the property. And if you sell your children your cottage at less than fair market value, youwill still have to pay tax on the real price. Then, your children will be deemed to have paid the lower price, resulting in double taxation when they sell the cottage. The only advantage of transferring part or complete ownership during your lifetime is that the amount of the gain taxable in your hands is ‘capped’ at the time of the gift or sale.

It’s a good idea to plan now for the succession of your cottage – and the rest of your estate, for that matter. Your professional and legal advisors can help you work through the options that are best for you.

Date reviewed: June 17, 2015

This column, written and published by Investors Group Financial Services Inc. (in Québec – a Financial Services Firm), and Investors Group Securities Inc. (in Québec, a firm in Financial Planning) presents general information only and is not a solicitation to buy or sell any investments. Contact your own advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant.