Canadian Lawyer

Real Estate Burden or dream? Passing the family cottage from one generation to the next can really stir up emotions and lead to family tension. A family cottage is where memories of summer days and daring plunges into an ice-cold lake are made. They're memories families hold with affection and want to share with the next generation. But passing the family cottage along to family members is fraught with challenges and comes furnished with plenty of emotional baggage. "Cottage owners are irrational human beings," says Fred Hacker. "There is a huge emotional attachment to the cottage and there's a huge desire to pass that on to the next generation. But it takes one person not paying their share, not carrying their load, and there's tension." The best advice, says Hacker, who is retiring from HGR Graham Partners LLP after practising in Midland, Ont., for 40 years, is to sell the cottage and let the kids buy their own. But rarely is that advice heeded. So the job of the lawyer in the inevitable transfer is to find a way the family can share the cottage, minimize the taxes, and avoid conflicts to try to be fair. Often not an easy 20 J u ly 2013 www.CANADIAN task, particularly when the objectives of one sibling don't match up with those of another and their respective spouses. The options are many: gifting the property, including it in the will, transferring it through joint tenancy, creating a trust, transferring it to a non-profit corporation, or selling. Each has its own trade-offs. Sometimes fair might mean paying more tax, says Corina Weigl, an estate planner with Fasken Martineau DuMoulin LLP. "Planning for the future is inherently uncertain," she says. "The one who typically loves the cottage may not be able to afford it." While passing a cottage from one generation to the next is the plan for the parents, it often ends up a complete nightmare. Echoing Hacker's advice, Weigl suggests anyone considering keeping the cottage in the family should take "a second sober thought and dialogue about whether that's a good idea. Parents have this romantic notion about how their kids are going to get along." In reality, she says, passing on a cottage, particularly when there's more than L a w ye r m a g . c o m one sibling, is simply passing on a burden. But families do pass the cottage from one generation to the next, which requires some examination and long-term thinking. Taxes often play a role in the transfer. A cottage may be subject to capital gains tax, probate tax, and land transfer tax. When the cottage is passed on as a gift, the adjusted cost base is the fair market value at the time — that could prove to be a tax advantage over one that's purchased at a discount, which can result in a double tax. The seller pays tax on the fair market value, not the discounted sale price. And when the purchaser sells, the purchase price is evaluated on the actual purchase price, not the fair market value at that time. To reduce the impact of the capital gains tax for the seller, the transfer could take place incrementally, over several years. If the transfer takes place over five years, the tax could be paid at a rate of 20 per cent a year. The downside is the possibility of additional costs to set it up. A seller may well take advantage of the principal residence capital Matthew Billington By Marg. Bruineman

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