The Future Is Now; What all Vacation Homeowners Should Consider

vacation

 

Over the last few months, as Canadians have begun to emerge from lockdown due to Covid-19, those that own vacation properties have begun to make the pilgrimage for some rest and relaxation.  For many families, the vacation property evokes fond memories of times with family and friends.  Strong sentimental feelings for these properties sometimes makes it difficult for owners to think about future use and ownership of the property.  Where there is a desire to pass on the cottage to the next generation, consideration must be given to the different transfer options and the income tax and other implications of each.

There a few options when passing on vacation property to children during the owner’s lifetime:

  1. Gifting the vacation property outright to one or more children
  2. Gifting a joint interest in the property to one or more children
  3. Selling the vacation property outright to one or more children
  4. Transferring the property to a lifetime trust, with each child named as a beneficiary of the trust. 

 An owner would consider transfer during their lifetime to reflect the reality of a child using the property more than the parents, desire for the children to look after maintenance responsibilities, to cap capital gains at the value at the date of transfer to avoid a large estate tax bill or to avoid probate fees on the owners death.   In each case above, the transfer of the vacation property will trigger a capital gain if the property is worth more than its cost.  This would be a tax liability for the transferring parents unless the principal residence exemption is claimed.

 There are a few options when passing on a vacation property on death:

 Outright transfer of the property to children on death

  1. Sale of the property by the estate, with one or more children have right of first refusal to buy it
  2. Transfer of the property to a testamentary trust created buy a will with the children’s names as beneficiaries

 Owners would consider passing on the property on death if they wish to maintain control during their lifetime, children are not yet old enough or financially stable to handle ownership, to protect the vacation property from claims by creditors, to protect from a marital or family property claim, to defer the tax on the capital gains, to maintain privacy regarding succession plans or to postpone the decision because the children do not get along.  Taxation on death would be the same as the transfer during lifetime.  In the case of a couple, the tax would be deferred until the death of the surviving spouse.

We always encourage dialogue between property owners and beneficiaries to clearly understand each party’s preferences.  Assumptions can be dangerous so maintain a clear line of communication.  As always please consult a professional to further explore the various options.

 

 Be Well Advised.

 

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