If you own a cottage or vacation home, your personal, emotional and financial commitment to it is often very significant. Who will inherit the property and how and when it will be inherited become serious concerns and are often worrisome. Without proper planning, cottages and other vacation homes can become the basis for family disputes, turning what should bring the family together into what tears the family apart. In addition, planning for financial aspects of succession, including taxes, is important, particularly if your property has significantly increased in value since its original acquisition.
In this Advisory, we provide a brief overview of personal, succession and tax considerations of importance to cottage and vacation home owners, and summarize a variety of general planning points and considerations with a view to ensuring a successful ownership transition and the avoidance of family disputes.
PERSONAL AND FAMILY CONSIDERATIONS IN COTTAGE AND VACATION HOME OWNERSHIP
Emotional Attachment and Desire for Ownership
A vacation home may have been owned for many years and, in some cases, through more than one generation of the family and may have an almost inexplicable personal and emotional significance to a family. If a vacation home has only been recently purchased, or has not been used as a family vacation destination, it may not have as many emotional ties for family members.
While some family members may have a very strong emotional attachment to the family vacation property, others may not. However, an owner of a family cottage or other vacation home may have assumed, or may in some cases expect, that each family member and his or her own family places a significant personal value on the family vacation home. It is extremely important that this assumption or expectation not clash with reality for a successful succession plan to be implemented in relation to the vacation home.
In addition, emotional attachment may or may not dictate an individual family member's own desire to have an ownership interest in the family vacation home. While he or she may not want to own it for his or her own use when the current owners pass it along to the next generation, he or she may still wish to have an ownership interest to pass along to their children or other beneficiaries as part of his or her family legacy.
Financial Ability and Other Personal Considerations
A desire to own or share in the ownership of the family cottage does not always coincide with the financial ability to pay for all or a share of the upkeep and maintenance costs of the property. A vacation home is often expensive to maintain, especially as the structure, septic and docks age and property values in certain areas rise, making for potentially high maintenance and replacement costs, and increasing property taxes. Without proper planning, leaving an ownership interest in a family cottage to a beneficiary who cannot pay their share of the costs, even if he or she wishes to have an interest, invites a host of future problems, and is often the source of family disputes.
Family members may also be unable to agree on how to share responsibility for upkeep and maintenance, both the financial and physical labour aspects. Family members with less ability to pay expenses may expect other, more financially able, members to pay more of the expenses. Family members using the property less often, or who are not as "handy", may expect to perform a smaller share of the upkeep than those using it more frequently or who are more "handy", despite equal ownership interests. Also, scheduling visits and issues of guest access, especially in regards to in-laws and ex-in-laws, may be a source of friction for multiple owners of cottages and other vacation homes.
TAX CONSIDERATIONS
Canadian and Ontario Tax Considerations
Of great significance for vacation homes which have gained in value is dealing with the potential capital gains tax burden. Barring a tax-free rollover to a spouse, significant capital gains taxes may be payable on transfer of the property or immediately on an owner's death.
Most owners of vacation homes located in Ontario are aware of the potential probate fee burden on an estate in passing on the property to beneficiaries, assuming the property is not passing to a joint owner with right of survivorship, which might be the case for a spouse
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