15 Cottage Succession Dos and Don’ts – The Cottager Magazine, Winter 2014
December 1, 2014
Mona Brown has written an article for The Cottager’s Winter 2014 Magazine.
“Once you become a cottage owner, it’s time to start thinking about when you won’t own the cottage or when you pass on. Here are some dos and don’ts to help you prepare a succession plan, or they can be used as a checklist if you already have one.”
While that may be a gloomy thought, it’s important every cottage owner have a cottage succession plan – and the sooner the better.
Many people consider that a daunting task, but it doesn’t have to be. Here are some dos and don’ts to help you on your way, or they can be used as a checklist if you already have a written cottage succession plan.
- DON’T just deal with the cottage in your will and surprise everyone. You may have created “hell on earth” for your loved ones.
Planning in advance of your death allows you to come up with a succession solution that works for your family.
We have all heard “horror stories” where the cottage is left to more than one child without a formal use agreement in place and then family disharmony starts.
It could be:
- Someone does more than their share of the maintenance and upkeep.
- Someone leaves the place unkept and never replaces anything.
- Someone wants to spend a lot of money on an addition; the others can’t afford it.
- Someone gets into financial difficulty and the cottage is involved in a bankruptcy or has a judgment placed against it.
- Someone wants to sell; the others can’t afford to buy that child out.
- Someone buys jet skis when the others refer to them as “lake lice.”
- Someone leaves their share of the cottage to a spouse, the spouse remarries, and no one likes the “new partner.”
- Someone lets the grandchildren use the cottage for a weekend and the place is trashed.
All these scenarios could have been prevented with a thorough use agreement and proper advance planning.
- DO discuss the cottage succession plan with your children – you might be surprised with the answers they give you.
In one situation, I had multiple meetings with clients to discuss whether their cottage should be left to their son or to the children of their deceased daughter. I finally convinced them to discuss the issue with their son. To their surprise, the son said he didn’t want the cottage and really wanted the daughter’s children to have it.
On another file, the children told the parents that none of them could afford the cottage and suggested they would rather have it sold.
- DO ensure you have a current power of attorney.
- DO consider a separate power of attorney specifically for your cottage – for you and for the children who will succeed you.
I had a file where the cottage owner had a stroke and was no longer competent. He had no power of attorney and no cottage succession plan. The cottage was in Ontario, but he was a resident in Manitoba. None of the children wanted the cottage, but it took more than a year to sort out the issues. Meanwhile, the cottage was not maintained (no one had money to do so) and it decreased in value.
- DO consider protecting the cottage from a claim under Family Property Rules. If you leave or transfer the cottage to a child and their spouse and then they split, the cottage might have to be sold to pay the Family Property Act claim of your child’s spouse.
- DO keep track of all your capital expenses on both cottage and the house – they add up and save a lot of tax.
The cost base is what you initially paid for the cottage (or its Dec. 31, 1971 value if you owned it before then), plus all capital improvements to the property. Capital improvements are items such as replacing or fixing the structure – roofs, walls, foundations, boat houses, docks, decks, and the septic/mechanical/electrical systems. Non-capital improvements would be buying a new fridge or stove, or making curtains.
- DO claim all of your capital costs and deal with the Canada Revenue Agency if audited, even if you don’t have all of the receipts for capital improvements.
- DO look back to see if you used the $100,000 capital gains exemption (CGE) in 1995. In 1994, the federal budget abolished the $100,000 CGE for all taxpayers. The budget gave us one year to use it. Many cottage owners had their cottages appraised and increased their cost base to the Dec. 31, 1994 value by electing in their 1995 tax return. This only applies to you if you owned your cottage prior to 1995.
- DO remain a resident of Canada or you will lose your right to the principal residence exemption.
- DO stay in your cottage a minimum of one day per year in order to be able to access the principal residence exemption on your cottage. The principal residence exemption can be used on different properties during different years.
- DO claim a second principal residence exemption for the years prior to 1982 if your spouse was the sole owner of another residence or cottage.
- DO consider selling a remainder interest in the cottage sooner, keeping a life interest for you and your spouse. This maximizes the use of the principal residence exemption on your home.
- DON’T sell your home without first consulting your lawyer and accountant and deciding whether your home or your cottage should be your principal residence. If you sell your home and don’t declare any capital gain, you are deemed to use the principal residence exemption on your home first.
I recently had a file where the clients owned their home plus a vacation condo in Arizona. The home was built in 1990 and had two additions, total cost of $200,000. They planned to sell it in 2014 for $300,000, a gain of $100,000. They had also bought a condo in Arizona in 2011 for $200,000 and anticipated selling it for $400,000 in 2015. The condo has greater gain so they should claim the years 2012, 2013, 2014 and 2015 with the condo as their principal residence and pay no capital gains tax on the condo. All the years prior to and including 2011 can still be used on their home, which works out to 92 per cent of the gain on their house being exempt:
2011 – 1990 + 1 = 22 = 92% Exempt
2014 – 1990 24
If the client had sold their home in 2014 and not reported the gain, they would have to pay taxes of $100,000 when they sell their condo in 2015. Capital gains are currently 50 per cent taxable, so the $200,000 of gain x 50 per cent equals $100,000 x their marginal tax rate in 2015.
- DO make sure your will is updated regularly and reflects your cottage succession plan. The law relating to testamentary trusts is dramatically changing. The new rules will come into force in 2015 and will be discussed in a future issue of The Cottager.
- DO consult a lawyer knowledgeable in cottage succession planning issues. It will make your decisions easier and less stressful, and will promote family harmony.
Mona Brown has been practising farm and cottage succession planning for 36 years, and recently achieved her tax and estate practitioner’s designation. She and her husband own a farm and a cottage. She practises at Brown & Associates Law Office in Carman, Man. (www.brownlawoffice.org).