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Plan your cottage inheritance

(Special) – Canadians’ love affair with the cottage is remaining strong as the family retreat from the city continues to increase in value and appeal.

This year’s report on recreational property by Royal LePage has found that the country’s recreational property market is headed for healthy growth as Canadians look to these properties for retirement or a secondary home to raise children.

The report found that the average price of recreational property in Canada will increase 5.8 per cent year-over-year to $467,764. Ontario and Alberta will lead the way with increases of 10.4 per cent and 8.9 per cent year-over-year to $535,885 and $770,100 respectively.

Prices are expected to dip in only three regions of the country — the Atlantic provinces by 7.5 per cent to $228,754; British Columbia by 2.8 per cent to $531,333; and Manitoba by 0.9 per cent to $230,833.

The survey found that prospective recreational property purchasers are coming from both baby boomers and gen-Xers in search of the retirement home of their dreams and as a place to introduce children to the wonder of wilderness areas.

Given the increasing value and interest in recreational properties, the family’s cabin by the water could very likely be a part of the family inheritance. A recreational property can bring with it a whole bunch of tax, ownership and succession issues.

One of the first things to consider is which home you’re going to designate as your principal residence. Capital appreciation on your principal residence is tax free, but you pay capital gains tax on 50 per cent of the appreciation on your non-principal residence. The decision can come down to whether the cottage has appreciated in value more in relation to the city home.

Many cottage owners want to hand their cottage down to their children or heirs for the enjoyment of future generations. Shannon Hood, a financial adviser with Sun Life in Golden, B.C., recommends parents sit down and talk to their children and determine who wants it and who doesn’t, who can use it and who can’t, and who can afford it or can’t, because these issues will very much affect the planning of how the transition of the property is done.

Cottage owners may be tempted to make their children co-owners without fully studying and understanding the financial, family and estate consequences of this action.

In some cases one child may want the cottage while the others do not. In such a situation parents may want to consider giving the children who do not want the cottage more in the way of money or assets in the will to compensate them. This could be accomplished by leaving them a life insurance policy for the equivalent value of the cottage.

If multiple children are interested in the cottage, Hood suggests a co-ownership agreement be written outlining how taxes and other expenses are paid, who has use of the property when and what will happen should one or more of the children want to sell their share or they die.

Other options include selling the cottage to a family member at fair market value which spreads out payment of the capital gains over a period of five years, or transferring the cottage into a trust, in which case the whole value of the property is accrued to the beneficiaries and taxes are paid upon death of the owner.

An insurance policy can be purchased to help offset the tax, and if the children purchase the policy the premiums can be divided among those who will be sharing the cottage after you pass on.

In all cases it’s important to sit down and discuss the cottage with your children and get the help of a qualified professional. Cottages often have deep personal and sentimental value and can end up resulting in messy and contentious arguments. “Have a formal agreement and do your planning in advance to avoid problems later,” Hood says.

Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.

Copyright 2018 Talbot Boggs

Talbot Boggs , The Canadian Press

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