Q: My wife and I own a recreational property. Two of our children are young adults and the youngest is a teenager. What should we do about planning to get our cottage into their hands either before or after we die? We don’t want anyone to pay estate tax on it, but we still want to use it while we’re alive.
A: My wife also owns a recreational property, but it’s definitely a cabin and not a cottage. In either case, this is a common question and one that causes a lot of reflection in families.
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I am assuming you have another home that is your main living quarters. If the cottage is your principal residence, then you will not have to worry about tax implications.
First, consider and determine your basic philosophy. Remember, anything you leave behind or give to others is a gift. It isn’t their divine right to inherit it, nor to get it for free, nor to tell you what to do with it now. I have the view that one should enjoy his own property while alive and let others worry about the fallout later. So oneoption for you is to simply leave it to your children and let them worry about it.
Second, forget about estate tax or succession duties. There used to be a federal estate tax but it’s been abolished since the early 1970s. Most provinces have also eliminated succession duties; my home province of Saskatchewan did so in the late 1970s.
Instead, you should consult an accountant or a tax planning professional about capital gains tax implications.
While the government took away estate tax, it put in capital gains the next year. This affects your question about transferring property to your children during your lifetime. Any transfer made to someone other than a spouse may be a deemed disposition and trigger a capital gain reporting requirement on your tax return.
Roughly, it works like this. You take the current market value of your cottage, subtract the price you paid (adjusted for certain factors) and get your capital gain. You have to report half of that gain on your tax return, and pay federal and provincial income tax on it. So a transfer to your children now means you are paying the bill to get it into their hands.
Consider the ramifications of giving them a legal interest in the property now. It sounds like your kids are young. What if they become part owners of the cottage, marry, then divorce? Do you want a share of this property tied up in your child’s divorce proceeding? Also, if they have financial trouble and become bankrupt, this property likely won’t be exempt and their share will go to their creditors.
Consider a formal agreement for sale as opposed to an outright and immediate sale and transfer. Taking payments over a fixed period of five to 10 years will ease your tax bill and allow you to monitor what else is happening in your children’s lives. Also note that in most provinces, children younger than 18 years cannot hold a registered interest in land so you may have to wait or do this in stages.
Like tax, it’s entirely legal and fair to minimize your estate costs. However, don’t get tunnel vision. Probate fees vary among provinces but your estate is probably looking at paying two to three percent of the total estate value. Frankly, that’s not very much and you won’t have to pay it. Someone else will have to worry about it.
You might also want to have your children enter into a use agreement. I’ve seen a lot of situations where a cabin is inherited and there is a lot of fighting about who gets to use it and who must maintain it. Sorting this out up front is a good idea.
After all, you yourself termed this cottage a recreational property. Doesn’t that mean you should have fun with it, as opposed to it being a burden? Your kids will figure it out.
Rick Danyliuk is a practising lawyer in Saskatoon with McDougall Gauley LLP. He also has experience in teaching and writing about legal issues. His columns are intended as general advice only. Individuals are encouraged to seek other opinions and/or personal counsel when dealing with legal matters.
