Case Study – The Family Cottage



Anne Hammond

Financial Advisor and Associate Portfolio Manager


As the days get longer, we look ahead to summer vacations and time with loved ones. For Dana, this means more time at her family cottage in the Gulf Islands. It’s a place full of happy memories, where for many years she and her husband spent quality time with their children.

Her husband is gone now, lost to illness a few years ago. Her children are grown with children of their own. They still love to visit and spend time at the cottage, but only the youngest lives nearby. Two of her children moved across Canada and one moved to Europe. While their time together is still precious, gathering at the cottage is now a rare treat for everyone.

At age 73, Dana is still very healthy and active. But maintaining the cottage is starting to feel more onerous, and she is alone there most of the time. In addition, she worries that it may become more expensive to keep. While the cottage is not in an area currently subject to BC’s Speculation and Vacancy Tax, that could change. If it does, the tax could cost her 0.5% of the property’s assessed value every year.

She and her husband had envisioned passing this special place to their children intact, but now she’s wondering if that is the best idea.

Many considerations come into play as she ponders her options:

Should she sell the cottage?

Dana owns her home, which has appreciated significantly in value over the 30 years she’s owned it. She and her husband originally purchased it for $200,000; it’s now worth approximately $1 million.

Canada Revenue Agency (CRA) rules state that each household can only claim one property as a principal residence for each tax year. Since the house has appreciated more in value than the cottage, Dana will want to designate her home as her principal residence for the years she’s owned them both.

Thus, if Dana decides to sell the cottage, the capital gain on it will be taxable. If she sells it for $1 million (after costs), her capital gain would be $800,000. As per the 2024 Federal Budget, if she sells after June 25, 2024, $491,850 would be taxable at her marginal tax rate (that’s 50% of the first $250,000 and 66.7% of the remaining $550,000). Her usual taxable income is approximately $85,000 per year, but for the year of the sale, it would be $576,850. She would owe approximately $242,630 in tax on the gain.In addition, because Dana’s income would be so high for the year, she would lose her Old Age Security (OAS) completely for a year. It would resume the following year once her income drops back down to normal levels, but this clawback serves as an additional tax on her capital gain.

Should she leave the cottage to her children in her will?

If Dana leaves the cottage to the children in her will, its capital gain will be taxable on her death. It will also pass through probate, which costs 1.4% of the market value at the time of her passing. Using today’s market value of $1 million, that’s a cost of $14,000.

Dana believes there will be enough other assets in her estate for her children to maintain the cottage for a few years while they figure out how they want to deal with it. If there were not enough assets, she could provide additional funds by purchasing a life insurance policy that would pay out directly to her children – tax-free – upon her death.

If she chooses this option, we recommend she discuss the plan with her children in advance. This gives them an opportunity to discuss how they want to proceed and do their own planning accordingly.

Should she put the cottage into joint ownership with her children?

On the surface, this might seem like the simplest plan, but it can quickly become complicated and has led to many court cases in Canada. At a high level, there are two main approaches to this option.

First, Dana could put the cottage into Joint Ownership with Right of Survivorship (JWROS) with her children, so they become legal owners with her, but she retains 100% of the beneficial ownership. The goal would simply be to avoid having the cottage pass through her will, skipping probate. The capital gain would not be taxable until her death, and the process of transferring the cottage into the children’s names would be much simpler.

What’s the catch? This option may create a bare trust, and going forward bare trusts may be required to file a T3 tax return each year under new CRA trust reporting requirements. While CRA is still finalizing their guidance on this issue, penalties for failing to file these T3 returns will be very high.

Second, Dana could gift her children with beneficial owner-ship when she puts the cottage into JWROS with them. When properly documented, this can avoid the bare trust situation, but it will incur a taxable realized capital gain at the time of the gift. There are other potential issues, too:

– The cottage could become a target for the children’s creditors.
– The cottage could be included in a child’s divorce settlement.
– The children would now share control of the cottage.
– The children could be subject to capital gains taxes if/when they sell it.

Clearly, there are many issues for Dana to consider, many of which will require legal and tax advice.

As her financial advisors, we will help her prioritize her goals, facilitate conversations with her children as needed, and work together with her legal and tax advisors to ensure that all the parts of her financial and estate plan work together. ■



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