Why Your Cottage Will Likely Be the Biggest Point of Contention in your Estate
Going to the cottage is a favorite Canadian pastime. Certainly, as we near the traditional midway point of the summer, the August long weekend, it is likely that a large number of Ontarians across the province have been spending the last two months or so up away from the city, sitting dockside, boating, fishing, or otherwise enjoying the sun. For most cottage goers, this is a beloved tradition, full of fond memories of fun times with friends and family.
Anyone who owns a cottage has no doubt turned their minds to how best they can preserve these traditions, including how to transfer the cottage down to the next generation. Family discussions over what will happen to a favorite summer gathering spot can get heated and stressful, and can even lead to estate litigation where matters are not handled proactively and appropriately.
Proactive Discussions with Family
Even for families who get along and appear seemingly close-knit, a lack of proactive discussions and planning around what will happen to the family cottage can lead to serious problems.
Issues can (and do) arise over things like routine seasonal maintenance, whether renovations should be carried out and when, who is responsible for paying property taxes and other expenses, etc. Some family members may be on board for regular weekend visits to the cottage while it’s the responsibility of parents or others but may lose interest or not be able to afford the costs of upkeep once that cottage (and its inherent responsibilities) gets passed on. This can result I
Disputes can get particularly heated around cottages due to the nostalgia, sentimentality, and memories that are often attached. Disputes can also be compounded when the children who inherited a cottage separate or divorce.
To mitigate the potential of future problems, families should have conversations about the future of their cottage- no matter how difficult the discussion may be. Things that should be discussed include:
- Which family members may not be interested in (or may not be able to afford) inheriting the cottage;
- Which family member may be interested in “buying out” the other family members;
- The potential of setting out fractional ownership (each child/beneficiary buys one or more shares of the cottage, with each share bringing with it a certain number of weeks of cottage usage);
- The potential of setting up a written agreement outlining terms of cottage usage, expenses, division of labour/tasks/maintenance/costs;
- Having an annual meeting to discuss potential issues and concerns;
- A dispute resolution formula for when issues do arise (including potentially retaining a neutral third-party mediator).
Making Provisions for Capital Gains Tax
Generally, where a property changes hands, the owner must pay tax on half of the amount by which the cottage has appreciated in value (including through any renovations or improvements made). Given how hot the market for cottages has become, this can be a significant sum of money. Many family cottages were purchased or built in the 1950’s or 1960’s and are now worth hundreds of thousands or even millions of dollars.
Families should plan ahead and strategize about how to transfer property in a way that is optimal for everyone.
- Putting children/other beneficiaries on the cottage’s deed as co-owners early, triggering capital gains at that time, allowing it to be paid off in stages and minimizing the taxes once the property is fully transferred;
- Transferring ownership prior to a parent’s death so that any appreciation in value in in the children’s/beneficiaries nae and will be deferred until they choose to sell it or until they pass away;
- Declaring the cottage a primary residence, thus making its transfer or sale tax-free;
- Rolling the cottage into a family trust.
The Risks of Not Thinking Proactively
While many of the above discussions are not something you want to think about, they are important. Where no forward-planning is carried out with respect to your cottage, it will be classified among the other general assets of your estate (i.e. your cars, jewellery, artwork, etc.). This may result in your executor having much more control over what happens to it then you may wish them to have, and can result in mismanagement of this important and sentimental family asset.
Complicated and emotional estate litigation may be avoided or at least mitigated through proactive discussions with your family.
Where disputes do arise, the knowledgeable and highly skilled estate litigation lawyers at Financial Litigation can help. With our specific focus on financial disputes, our team has a deep understanding of the ins and outs of estate litigation, and works with a network of expert forensic accountants and valuations professionals that help create a strong case. Call 416-769-4107 x1 or contact us online to schedule an appointment.