When it comes to recreational properties such as cottages or vacation homes, families often want to pass these properties down in the family, to preserve them for future generations to enjoy. However, depending on how this is done, there are various issues to be aware of; primarily, how the tax implications will affect the various parties. How and when a property is transferred will greatly affect the financial obligations, so below we will provide an overview on the various methods for inter-family transfers of real property.
1. “Gift” the Property to Family Members
By giving the property to a child during one’s lifetime, the parents have the benefit of seeing the property exchange hands, and the security of knowing the property has been dealt with. However, there are a number of things to keep in mind when gifting a property this way.
Tax Consequences for the Giftor
If a parent gives a recreational property to their child or children, there will be what is called a ‘deemed disposition’ of the property, for tax purposes. This means that, although no money was exchanged for the transfer of the property, the government will treat the transaction as if the property was sold, and tax the transferor on the capital gain realized on the increase in the property’s value from the time the transferor took possession to the date they disposed of the property. If the parent has owned the cottage for a long time or made significant improvements on the property while they owned it, this amount could be significant. The tax impact of the gift can be spread out over a number of years, if the parent were to gift the property in stages, transferring say, 20% of the ownership each year over a five-year period by adding the child to the title as a Tenant in Common, which allows for an unequal ownership share in real property.
Another tax consideration that may come into play is the possible impact on government subsidies for the transferor, such as Old Age Security. Some subsidies may be affected once a person’s annual income reaches a certain threshold, so it is important to review the transferor’s full financial situation before deciding whether this option is ideal.
The Property Could be Vulnerable to Third Parties
Once all or part of the property is placed in another person’s name, this could open up their share of the property to third-party interests. For example, if the child were to become bankrupt, or divorce their spouse, their share of the cottage may be subject to transfer or sale.
2. Leave the Property to Family Members in a Will
Careful estate planning can ensure the property is passed on to the owner’s child(ren) in a way that lessens the tax burden and, in certain circumstances, can even retain a level of control over the property after death.
As with a gift, the transfer of the property through a Will will result in a deemed disposition for the transferor and a tax consequence on the capital gain realized. However, if the transfer occurs upon the owner’s death, then funds from the estate can be used to pay those consequences rather than being payable by the transferor during their lifetime.
Consider a Trust
It may be worth considering establishing a trust to oversee the ownership of the property, especially in cases where there are multiple children who will have an interest in the cottage. This enables the transferor to leave a portion of the trust to each child, protecting the property from vulnerability to third-party interests in the event one child divorces or enters bankruptcy.
3. Sell the Property and Distribute the Proceeds
Another option would be to simply sell the property during the owner’s lifetime, particularly if it appears their children have little interest in the cottage or would be unable to equally share the property. For example, if the ower’s children live in drastically different geographic areas, joint ownership of the property may really only benefit one of them. Selling the property during the parent’s lifetime will allow them to realize the proceeds from the sale, and leave additional funds to their children after their death, allowing the children to spend the money as they see fit.
The real estate lawyers at GLG LLP in Toronto assist clients with a full range of residential real estate services, including purchases and sales, financing and even litigation if necessary. The firm offers exceptional client service as well as a Bay St. experience with more reasonable rates. Call 416-272-7557 or complete the online form to arrange a consultation.