“Your children or beneficiaries may be faced with a substantial capital gains tax bill of tens of thousands or hundreds of thousands of dollars just to keep the cottage that already own in your family.”
I know that we are in the middle of February and summer seems a long way off, but before you know it, spring and then summer will be here. That often means spending the longer days in the sun and enjoying your cottage with your family and friends.
Perhaps you may also be considering the future of your cottage and your plans to pass it down to your family.
There is always a sizeable gasp when I begin to explain the tax bill that children or beneficiaries will be faced with if they neglect to plan for the capital gains tax that will toll on their cottage when they die.
It can seem a little bit unfair, and your children may wonder what the heck you may have been thinking about if you don’t plan for the eventual bill when they may have to choose between paying the tax or selling the cottage.
In essence, you or your beneficiaries will possibly be faced with a substantial capital gains tax bill of tens of thousands or hundreds of thousands of dollars just to keep the cottage that already own in your family.
You may as well consider your options now and that is what we will be looking at in this article.
What are the Options?
Your children could pay the tax when you die.
- Are there funds available?
- What’s given up by you or your children to pay the taxes?
- Typically, the best estate assets are sold first to minimize liquidation losses.
Unfortunately to preserve as much of your estate as possible, liquidation may force you to sell your most prized assets to protect the rest. Only they will command the highest price when cash is needed fast.
If the intent is to keep the cottage in the family, does the will give explicit instructions as to which assets are to be sold to pay tax liabilities?
Money could be borrowed to pay the tax
- Would credit be readily available?
- Would the borrowers have adequate cash flow to repay the loan with interest?
- What would the non-deductible interest rates be?
Money could be paid in installments after your death
- Would your estate or your children be able to provide the necessary security to the government?
- Would your estate or your heirs have adequate cash flow to repay the amount owing with interest?
- What would the interest rates be?
Use life insurance to pay the taxes
- Income tax liabilities arise on death and life insurance creates immediate, tax-free cash to provide a solution.
- Joint second death protection provides a very economical way to provide cash to your estate when the second spouse passes.
- It can be custom designed to handle your needs and values.
- Consider having your children own it and pay for it. After all, they benefit from keeping the property.
- The policy can be set up to mature or be paid out when both parents have passed away.
You may be pleasantly surprised at your ability to qualify for coverage. This alternative pays off any capital gains and associated costs of keeping the family cottage and property in the family. It can help equalize inheritances if the vacation property is not shared amongst siblings.
Planning to pass down your cottage to your children is a common plan for many Canadians. Make sure that you consider the tax bill that will need to be paid to keep the cottage in the family. You have options on how the bill can be paid, but it will need to be paid.
If you would like to discuss your options regarding passing your own cottage or vacation property down to your children, you can BOOK A FREE CALL.
THIS ARTICLE IS PROVIDED AS A GENERAL SOURCE OF INFORMATION ONLY AND SHOULD NOT BE CONSIDERED TO BE PERSONAL INVESTMENT OR LEGAL ADVICE. READERS SHOULD CONSULT WITH THEIR FINANCIAL OR LEGAL ADVISOR TO ENSURE IT IS SUITABLE FOR THEIR CIRCUMSTANCES.