As the old saying goes, the only guarantees in life are death and taxes. It’s an ugly truism, often painfully driven home when it comes to passing the family cottage from one generation to the next.
After all, the family patriarch who owns the piece of lakeside paradise can’t live forever. When he does pass the cottage on, the Canada Revenue Agency (CRA) will want its tax share of any capital gains made during the years of ownership.
So the question arises: What strategy works best for transferring an asset worth hundreds of thousands of dollars in a tax-efficient manner that’s also acceptable to all family members involved?
The answer depends on each individual family, but one thing is certain, says Larry Fayle, director at Scotia Private Client Group in Winnipeg.
“Whether the cottage has been in the family for generations or is a recent purchase, it’s a prized jewel for most families, and if they want to continue to have that passed on for generations, a well-thought-out plan needs to be in place.”
Of course, determining what the plan will be is far from easy, experts say. Countless articles have been written and seminars have been held, all aimed at providing the clearest answer, says John Poyser, a lawyer and a Free Press business columnist who writes about estate-planning issues.
“The frustrating thing is, the answer for each family is it depends upon the delicate interplay between a variety of factual circumstances and a variety of provisions under the Income Tax Act,” says Poyser, with Wealth and Estate Law Group.
The best way to begin is to break the process down into “building blocks,” says Poyser, one of three experts speaking at a cottage-succession seminar hosted by The Knowledge Bureau next weekend at the Winnipeg Free Press News Café.
Capital-gains tax considerations may be the most talked-about building block, followed by probate fees.
But two other blocks, though more touchy-feely, are equally important.
One deals with immediate family relationships. Generally, splitting ownership of a cabin among children, while mathematically equal, does not equate to a fair deal.
“Everybody has a different stake,” Fayle says. “Fair does not always equate with an equal share of the cabin.”
Figuring out what is fair often isn’t easy. The family needs to meet and discuss the matter. The goal is to avoid long-term family disharmony.
“In my experience, the two most common ways to destroy a family around a cottage are No. 1, to do your cottage plan in secrecy without the children,” Poyser says.
“The second way is to dump it into joint ownership, or common ownership, without any mechanism in place to resolve disputes or other issues, like sharing time.”
Feuding among siblings over who spends May long weekend at the cabin can be troubling enough. Throw in strife with the in-laws and a poorly laid-out estate plan, and you’ve got a recipe for a legal and tax nightmare. Avoiding that divorce-related hazard is the fourth building block.
Poyser says inheritances and gifts, such as a cabin, are not considered communal property in divorce proceedings, so at first glance, the in-laws can’t get a share when marriages go awry.
“A family member could, in theory, marry and divorce as often as Elizabeth Taylor and never see the cottage in the financial equation at any of the breakups.”
In reality, however, it’s often more complicated.
“Because cottages are often money pits, the child and his or her spouse have devoted tens of thousands of dollars out of the marital pot into the non-sharable asset,” he says. “That frequently results in the loss of protection around the cottage.”
The situation is avoidable, but it may involve costly hours in a lawyer’s office — and only after the family first discussed the future of the cabin.
Once these “soft” building blocks have been resolved, the tax and probate fees issues can be addressed to provide the most financially efficient execution of the plan.
Poyser says probate fees often arouse more anxiety than they should. These fees cover the court costs for validating the will. In Manitoba, fees are $7 for every $1,000 of assets in the estate. On a $200,000 cottage, that’s $1,400 in fees — chump change compared to the capital gains tax when the cottage changes hands.
Undoubtedly, the capital gains building block is the most complicated financial issue because owners of two or more residences often can elect to have the cottage designated as a principal residence, which exempts it from capital gains taxes, says Evelyn Jacks, author of Essential Tax Facts and president of The Knowledge Bureau.
But it’s not as simple as selecting the property — cabin or home — that has gained the most value over the years for the exemption.
Jacks says owners need to consider a number of factors in calculating the taxable capital gain, such as valuation dates dealing with when certain taxation rules came into effect and the adjusted cost base, which includes the cost of improvements made to property over time.
It may also be the owner has moved to two or three homes without paying capital gains taxes on those transactions during the course of cabin ownership, which may eliminate the cottage as the principal residence for those periods. “Alternatively, transfers can happen during lifetime or at death, in which case tax consequences can vary,” she says.
Crunching the numbers for each individual case is different, and paying as little tax as possible isn’t always the best strategy. Often, those softer building blocks play a bigger role, she says.
“Family harmony is so important in planning, because the cabin is where all the good memories are, and so you can’t just let the tax tail wag the dog.”
http://www.winnipegfreepress.com/opinion/columnists/cottage-industry-131379478.html
Edmonton Auto Finance Calculator
Winnipeg Hot Water Heaters One Hour
Wpg Manitoba Ford 2011 F150 Trucks
www.crossfireconsulting.net
Related Websites - Year End Income Tax Guide (Part 1) Part of the hard truth we all have to accept includes death and taxes. Even Mr. ToughMoneyLove can take only such much hard truth so I choose not to write about death. That leaves taxes....
- Buying and Selling Stocks 101 When it comes to investing in stocks, most people predominantly rely on mutual funds. Mutual funds are a type of professionally managed investment pool that allows you to cast your lot along with thousands of...
- Taxes on Annuity Income to Increase Many boomers are considering buying immediate annuities to provide a supplemental retirement income stream that is guaranteed to last for life, assuming that the insurance company remains solvent. Unfortunately for some annuity purchasers, taxation of...
- How To Get Free Music Slacker Offers free streaming music to your desktop or hand-held slacker device. Quite a large of music and no annoying ads interspersed between tracks unlike Yahoo!'s Launch player. You can also add your favorite artists...
- Couples and Money Matthew Paulson of Finance is Personal asks, "Should Married Couples Combine Their Finances?" His answer is an unqualified yes. One of the things I love about the Finance is Personal site is that it almost...