- Talk to your family members
It won’t be easy. However, you must try to put your emotions aside and decide on the best way to proceed. Consider the following aspects:
Do you have the means to bequeath your chalet? Or do you need capital to finance your retirement?
Do all your children want to keep it? Or would some prefer cash settlement?
Will those who inherit it be able to pay property taxes and maintenance costs?
Are your children scattered across the country, making it unlikely that they can share the cottage equally?
Could personality differences be potential sources of conflict?
- Consult an advisor
An advisor can suggest strategies that will help alleviate many of the problems associated with transferring a cottage. In addition, depending on your needs, he can refer you to other professionals such as a lawyer specializing in estate planning or a tax accountant. Here are some of the options that might be suggested to you:
Designate your cottage as your primary residence. Your principal place is sheltered from capital gains tax. So if you own more than one property and your cottage is the one that has appreciated the most in value, this strategy could reduce the amount of tax your heirs will have to pay. And you don’t even have to live in your cottage full-time to designate it as your primary residence. As long as you spend the night there from time to time, you have the right to do so.
Use life insurance to cover tax liabilities. Purchasing a term life insurance policy that provides enough tax-free death benefit to pay the tax liabilities arising from the transfer of the cottage can be a sensible strategy. It can also allow children who are not interested in inheriting a share of the house to receive a sum of money instead. The contract can even be set up so that the children, who will ultimately be the beneficiaries, assume the cost of the insurance premiums.
Transfer the chalet to your beneficiaries now. There are several options. In particular, you can give or sell the chalet to your children or allow them to become co-owners. Each option has its characteristics. The advantage is that your heirs will not have to pay the probate fees that apply when a chalet is registered in the estate. The disadvantage is that you no longer have control of the property. It should also be noted that a donation immediately gives rise to a taxable capital gain based on the fair market value. However, to help spread the tax burden, you can donate the property gradually over time.
Transfer the cottage to an inter vivos trust. Although transferring property to a trust is more expensive than a simple bequest, this approach allows the place to be bequeathed without incurring capital gains tax or probate fees. Pay. However, the maximum period during which capital gains remain sheltered from tax is 21 years. Only people aged 65 and over can set up an inter vivos trust in Canada.
Transfer ownership of the chalet to a non-profit organization. Family members thus become members of an organization that operates as a private club and are required to pay dues. Although the initial transfer is likely to result in a capital gain, future generations will be able to use the cottage without paying capital gains tax or probate fees. This strategy works well for large enough properties to be shared by extended family members.
Invite your children to draft a co-ownership agreement. Working together on how they will share the family cabin in the future can help prevent problems when you are no longer there. It can also help you ensure that you implement the right financial strategies to help them achieve their plan.
The sharp rise in property values and the associated tax makes it much more complex than before to bequeath the family cottage. Careful planning, however, can help ensure that future generations will be able to enjoy your house.
