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FAMILY COTTAGE! |
GIFTING FAMILY COTTAGE and the CAPITAL GAINS TAX
The personal tax exemption on capital gains is long gone! (Shock?! Surprise!!) What does this mean to you besides the exposure to more taxes.
Well, this is directed particularly to cottage owners. No, more specifically, to cottage owners who don't and never did consider their cottage as an investment. If you are like most in this category, you are probably like me, a first generation Canadian who's father bought a small cottage property in the late '50s or early '60s. for less than $1,000.
You probably erected the shell of a family cottage from scratch with friends and relatives over several blackfly ridden spring weekends, then spent the next 15 years finishing the inside to a rustic 'early Muskoka' interior decor.
Truly a labour of love! Hardly an investment.
After 30 years there she sits, the family cottage, a shrine of memories. Memories of the first swim of the year on the May 24th weekend [brrrr.. vivid memories]; early morning fishing outings; dusk to dawn card game marathons; midnight skinny dips, just to name a few classic universal cottage activities. Then there are the priceless memories; Suzy's first swim strokes and her encounter with a garter snake; Johnny's first fish; Fido's run in with a porcupine; the Saturday night socials at the local dance hall, then Suzy's first kiss causing Mom and Suzy to talk endlessly on the porch; or the long father to son talks by the camp fire. Truly, many first in our lives occurred at the cottage. We have a cottage for the same reason as we have photo albums.
Most of us view the cottage as an album of memories,
...not an investment asset.
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If you're like thousands of other cottage owners, the next 30 years are already clear in your mind. You intend your children to share the same experiences and create the same wonderful memories with their kids, your grand children, as you did with yours.
But are you sure this dream can be realized?
Well, while you were accumulating all this wealth of memories over the past 30 years your cottage has also accumulated a sizable wealth or worth, of its own, on paper.
I'm sure you have with some pride admitted to family and friends the Fair Market Value of the cottage, probably 30 to 50 times or more its original cost.
I emphasize, paper value,
| ...cause it doesn't produce any money unless you sell it. But you don't want to sell it! |
What you really want is to perpetuate the album of memories, through to the next generation. What greater gift can you give your children than the opportunity to duplicate what you cherish the most, your album of memories, the cottage.
In your mind, its clear as a bell! No question! ... the cottage is staying in the family! ...right?
A truly noble idea, but a dream that's not guaranteed to come true unless you have considered the difficulties of such a plan. We may be able to help.
Remember ...a goal without plans is but a dream...goals with plans become reality.
If you are one of the many Canadian cottage owners who's goal is to gift the family cottage or 'album of memories' to the kids, there are one or two potentially large road blocks in your way.
The first one is tax, specifically, capital gains tax. To give the cottage as a gift is, for tax purposes, the same as selling the cottage. The amount of gains tax is based on the value of the cottage a stranger would be willing to pay. This is called the Fair Market Value. A portion of the Fair Market Value is subject to tax. Generally speaking, the portion that is subject to tax is 3/4 of the growth in value of the cottage between the day you bought it, (1971 if bought earlier) and the date you make the gift. You, the owner, have to pay this tax in the year the cottage was gifted.
A simplified example illustrates the potential size of this tax liability.
| A. Original Cost (Book Value) |
$5,000 |
| B. Maintenance Renovations Taxes etc. |
$25,000 |
| C. Adjusted Cost Base |
$30,000 |
| D. Current Value (FMV) |
$500,000
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| E. Capital Gain (D-C) |
$470,000 |
| F. Taxable Capital Gain (50% of E) |
$235,000 |
| G. Tax Liability -
if sold or gifted now or at death
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$108,100 |
Over $100,000 to the Feds and Province... Why?... It's not right !!! but REAL....
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The question is,
... can the 'kids' afford to accept your gift?
The second real problem for many cottage owners is the
"unequal endearment quotient".
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Several children are in line to inherit the cottage but not all the children hold the album of memories with equal fondness. Some may have moved away and can't use it. Others hate the outdoors. Some may even be feuding with each other, making joint ownership impractical.
So, how do you solve the real problem of three kids obviously having equal rights to the cottage but only one really wants to take it and use it. How do you make the wish come true without short changing the other two? Is it realistic or practical to have the inheriting child pay 2/3 of the value of the cottage to the other two and his share of the tax?
Using the above example, paying the tax and buying out the other two would amount to $166,250. Is this realistic to pay for a gift? ....... Is it affordable?
Using a 20 year amortized mortgage at 5% puts the total cost of the gift to the new cottage owner at over a quarter of a million dollars.
Most don't imagine a gift costing anything, let alone a quarter of a million dollars.
THERE IS ARE TAX EFFECTIVE ways to transfer ownership to the family cottage to children or grandchildren when your ready.
A well defined and executed strategy can deflect, reduce or eliminate some or all of the tax liability.
We can utilize some or all of the approaches available to minimize the size of the tax liability and still accomplish your intentions. Some are:
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Historical use of the tax exemption.
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Ownership structuring
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Establishment and Financing a Pre-Paid Capital Gains Tax Account for pennies on the dollar which could be funded by the cottage owner or the entire family.
Have you set up your PrePaid Capital Gains Tax Account for the cottage and other appreciable assets with Canada Revenue Agency? If not,
DON'T LET THE FAMILY ASSET
MELT AWAY
THROUGH BENIGN NEGLECT!
Get in Touch for a free no obligation consultation
To read a similar article please read "Cottage Succession"
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Family Cottage -Capital Gains