How to keep the family cottage in a family way
In a two-part series, Jamie Golombek looks at tax
strategies for your vacation property. This week, probate taxes. Next week,
he looks at capital gains taxes.
As you sit on the dock sipping a cold beer, contemplating another blissful
summer weekend at the cottage, you may also be sitting on a major tax problem:
how to pass your vacation property on to the next generation with minimal pain.
The problem is potentially twofold: Upon death, in all provinces other than
Quebec, the cottage may be subject to probate tax. Of greater concern if your
property has increased significantly in value is the capital gains tax.
The probate problem is the lesser of two evils. Upon death, each province
(except Quebec) levies a probate tax on the value of assets passed through the
estate. That probate tax ranges from 0.4% in Prince Edward Island to 1.5% in
Ontario. Only Alberta and the territories have maximum caps of $400 ($140 in the
Yukon). For example, an Ontarian who wills her $500,000 Muskoka cottage to her
kids would face a probate tax bill of about $7,500.
One common probate-avoidance technique is to jointly register title of the
property. Joint ownership with right of survivorship means that upon the death
of one joint owner the property is simply transferred directly to the surviving
joint owner, bypassing the estate and not subject to probate tax.
However, the advantage of joint ownership is mired in a plethora of other
problems, some of which may be more significant than the probate tax bill. The
biggest problem, and the subject of two cases that will be heard by the Supreme
Court of Canada in December, is proving the transferer's true intention -- is it
a gift or merely an estate-planning strategy?
For example, say Harold transfers his $1-million Whistler condo to joint
title with his adult son, Kumar, whose family vacations there on weekends in
summer and skis there for two weeks during Christmas. Harold's only other child,
Maude, lives in Halifax, and does not use the property at all.
Upon Harold's death, the property will simply transfer directly to Kumar's
name, bypassing the estate and avoiding B.C. probate tax of $14,000 (at the 1.4%
B.C. rate). But did Harold really intend for Kumar to inherit the entire value
of the condo, to the exclusion of Maude? What if the condo was the only major
asset owned by Harold upon his death and there was little else left in his
estate for his daughter?
If the two cases heading to court are any indication of what might happen in
this hypothetical example, Maude would likely hire a lawyer and sue her brother
for half the value of the condo, arguing that the transfer into joint ownership
was merely an estate-planning ploy meant to avoid probate. Surely, Dad didn't
intend to disinherit Maude -- or did he?
One of the newer planning techniques available since 2000, is to transfer a
vacation property into a special type of trust known as an "alter-ego" trust. If
you are at least 65 years of age, you can legally transfer the property into the
alter-ego trust without having to pay immediate capital gains tax on the
You can continue to maintain full control of the property through the trust,
but you can name your children as the ultimate beneficiaries of the trust, who
would then inherit the property upon your death. Since at the time of death you
no longer own the property -- it's owned by the trust -- it's not included in
the value of your estate for the purposes of calculating probate tax.
The downside, of course, is that there may be income tax consequences
associated with the deemed disposition of the property upon death.
Colour Photo: Brent Foster, National Post; You could be sitting on a major tax
problem with the family cottage. Probate taxes, which vary by province, are the
least of your concerns.