As the warmer weather rolls around, Canadians tend to head towards their Canadian vacation properties. Whether you refer to it as a cottage, chalet, camp, cabin, or just a secondary home, these are often significant sources of personal enjoyment for many. If you are a Canadian vacation property owner, you've likely invested time, money, and effort into ensuring that your property is a haven for relaxation and enjoyment. As such, it may be of utmost importance for you to keep the ownership of that vacation property and the corresponding memories within the family. Here are some things to consider in passing on ownership of your vacation property to the next generation.

1. Start early: It's never too early to start planning for the future. Initial plans for succession planning can start as soon as you first acquire your property. This will allow you to put a comprehensive plan in place and ensure your wishes are met.

2. Communicate your wishes clearly: It's essential to properly communicate your plans with your family members or beneficiaries to avoid misunderstandings and disagreements. Consider hosting a family meeting to discuss and clarify expectations; this can provide an opportunity for those interested in retaining ownership to explain what they envision for the property. Some questions to consider include:

- Are multiple children interested in owning the property?

- Is shared ownership and use of the property feasible?

- Can your children establish clear rules for property usage, costs, and ownership responsibilities?

- Are your children financially equipped to maintain the property?

3. Maintaining your property and family harmony: Keeping family harmony and avoiding conflict requires setting clear ground rules when multiple children express interest in sharing the property. A clear understanding of how the property will be shared, maintained and who will be responsible for each task is necessary to avoid arguments. Some items to guide discussions of shared use include establishing exclusive use times, such as deciding on an appropriate system for special holidays and agreeing on expectations for how a property will be left at the end of a visit. For maintenance, deciding on the scope of work and who will do it, along with creating a process for making decisions about renovations or improvements, is crucial. Financial aspects, such as setting up a joint bank account, determining contributions, arranging payments, and covering property taxes and utilities, must also be addressed.

4. Tax implications associated with the property: There are several options available when it comes to succession planning. Generally speaking, upon your passing, there is a deemed disposition of your properties at fair market value, which is subject to capital gains tax.

One option is to gift or transfer the property during your lifetime, which allows you to see your loved ones enjoy the property while you are still alive. There may also be a tax benefit if you anticipate a significant increase in the value of your vacation property in the future, as you can transfer any future appreciation of the property to your beneficiaries and limit your ultimate tax liability. In addition, this can help lower the probate fees that may apply to your estate upon death, as the vacation property will no longer be considered part of your estate.

Another potential option is to transfer the property to a trust. By doing so, you can ensure proper governance and reduce the risk of disputes, especially when multiple beneficiaries are involved. Additionally, any future growth of the property will not be taxed in your hands, which could minimize or defer capital gains tax. Furthermore, a living trust can help minimize probate fees payable on death since the property inside the trust is not included in the value of your estate. Finally, when structured properly, the trust can offer protection from your beneficiaries' creditors, including marital creditors. While there may be tax implications in the year of transfer, moving a vacation property to a trust can be a smart and effective estate planning strategy. Alternatively, you could just leave the property in your will, although this could result in estate taxes and potential challenges with probate.

5. Setting up a cottage trust: If you've made the decision to pass on your vacation property to your children in some way or another, you may want to consider establishing a separate trust to provide them with additional funds for ongoing expenses such as property taxes and upkeep. This can be done by setting restrictions on withdrawals to ensure that the funds are available when needed.

Estate planning can be a complex task tying into many other aspects of your financial strategy, and consulting with your financial advisor is essential to craft an approach that fits your specific needs and goals. Succession planning for your Canadian vacation property is crucial to ensuring that your property remains in good hands and is passed down smoothly to your children.

 

This information is not intended as, nor does it constitute tax or legal advice. Readers should consult their own lawyer, accountant or other professional advisor when planning to implement a strategy