Ah, the great Canadian cottage dream….lazy days in the summer relaxing by the lake….watching the kids swimming or learning how to water ski. Or enjoy your own ski chalet, hosting happy family dinner gatherings after a day on the slopes.
Canadians love their recreational properties and demand for cottages and ski chalets keeps pushing up prices. Many baby-boomer Canadians who bought cottages years ago have seen significant price appreciation, but property taxes and maintenance costs have also increased.
The Federation of Ontario Cottagers’ Associations (FOCA) says that with many current cottage owners approaching or past retirement age, it’s getting harder for them to afford cottage ownership costs. “Financial planning and prioritization of resources is critical to enable this generation of owners to afford to retain the cottage for the next generation,” says the federation on its website.
“For many, the only viable cottage opportunity for themselves and their children is to preserve the existing cottage in the family, sharing the usage and costs with siblings and other family members. Family cottages shared by multiple sibling families can cause inevitable friction, differences and disputes for any family, putting the continued survival of the family cottage at risk following the succession.”
The association says the solution is to get help with professional cottage succession planning, which will include estate, tax and legal planning.
Mona Brown, a lawyer based in Carman, Man. writes in The Cottager magazine that simply stating in your will that you want your children to have the cottage isn’t good enough.
“Don’t just deal with the cottage in your will and surprise everyone. You may have created ‘hell on earth’ for your loved ones,” she says.
There are a lot of questions that must be addressed in succession planning. Who will own the cottage? If it’s jointly owned by siblings, what happens if one of them dies? What if a sibling doesn’t want the cottage and wants to sell, but the others can’t afford to buy them out? What if a sibling gets divorced and their spouse demands their share of the value of the cottage?
Who will be responsible for maintaining the property? Who will pay for maintenance and repairs? What if one of the siblings can’t afford to maintain their share?
How will the precious time spent at the cottage be divided up among the family? How will they deal with disagreements about when, for example, it’s time to buy a new boat or renovate the kitchen?
“The first challenge in changing the ownership of a cottage is the capital gains tax,” says FOCA. “This must be paid when the cottage is sold or transferred during the parent’s lifetime or after their death. Although the federal government recently reduced the impact of this tax, it can still cost tens of thousands of dollars, and many families are forced to sell the cottage as a result.”
There are several possible solutions to reducing the impact of the capital gains tax. One is declaring that the cottage is your principal residence, if it has appreciated in value more than your home. The principal residence exemption can be changed to different residences in different years, but you do have to spend some time living in the property that is designated as the principal residence.
Another possibility is changing the ownership of the recreational property so you own it jointly with your children.
Many cottage owners purchase a life insurance policy that will help pay for the capital gains tax upon their death. Money from the policy could also be used to pay off any siblings who do not want to share in ownership of the cottage.
In some situations, families have set up a trust that is managed by a third party. This is important if the children are still too young to manage the estate.
Experts say the sooner you can implement a cottage succession strategy, the better. Brown says you should also consider having a power of attorney drawn up specifically for your recreational property.
It may not be pleasant to plan for a future of change at the family cottage, but you should have these discussions now. Make sure all the stakeholders know what will happen to the cottage in future, so everyone can plan their finances accordingly and prepare for the emotional upset that changes will bring.
Written by Jim Adair