Holding onto memories while letting-go of ownership
Some of the hardest estate planning decisions are not about dollar values, but about personal values. A prime example is the family cottage, where the memories are many, and the mere mention of letting-go can be painful.
Unfortunately, it’s not much easier on parents who intend to keep it in family hands rather than sell to strangers. Among those you love, it can be even more emotionally troubling to decide when, how and to whom ownership will pass.
To prepare for these tough choices, it’s helpful to have a clear understanding of tax and legal rules so that you can anticipate hurdles and consider options.
Tax liability for parent as seller/transferor
Apart from spousal transfers, a change in beneficial ownership is a taxable disposition. Half the increase in value from the adjusted cost base (ACB) to the fair market value (FMV) is added to the seller/ transferor’s income for that year. The ACB is generally the acquisition price plus capital improvements.
The tax bill could be reduced by claiming the principal residence exemption (PRE), though that would limit use of the PRE on a future disposition of other concurrently owned residential properties.
Options for passing ownership to one or more adult children
In an arm’s-length sale, a seller transfers ownership without control or concern as to how that arm’s lengthpurchaser holds title. In family situations, there are more options that parents may consider:
Direct transfer to one child
Even if little or nothing is paid in return, a full disposition is deemed to occur at FMV for purposes of calculating the capital gain. Thereafter, the child has all rights of ownership.
Adding joint owners
A proportionate disposition is deemed for each added owner. For example, a widowed mother who adds 2 sons is deemed to dispose of 2/3 of the value. The later death of any joint owner is a disposition of that person’s share, with the survivors continuing to own the property together.
Using tenancy-in-common
A parent could direct a specified percentage to transfer to one or more children, to be held as a tenant-in-common. Like joint tenancy, there is a disposition on initial transfer and on an owner’s death, but the deceased’s rights pass to his/her estate, not to the surviving owners.
Tax-deferred trust transfer
Parents over age 65 could transfer the cottage into an alter ego or joint partner trust for their current benefit, with the children as contingent beneficiaries. The property is not deemed disposed until both spouses die, at which time capital gains would be calculated and tax due.
Transfer to a lifetime trust
The parents may be content to trigger a taxable disposition to a trust now. They could maintain legal control as trustees, with future gains accruing to the children as beneficiaries.
Estate distribution possibilities
If the cottage is held to the second spouse’s death, the capital gain arises at that time. The cottage could then be transferred to the children (tenants-in-common or joint owners, as desired) or continue to be held in trust according terms as outlined in the last deceased’s Will.
Funding the tax liability
Allowing that the PRE may be claimed in some situations, tax on the capital gain is usually inevitable. And if it’s large, the decision may be to delay triggering it until death. Parents could buy joint last-to-die life insurance to pay the tax, or allow that other estate assets will have to be sold to raise the needed cash.
For more information, please consult your financial advisor and tax professional.
Article provided by Aviso Wealth.
Mutual funds are offered through Credential Asset Management Inc. and Qtrade Asset Management (a tradename of Credential Asset Management Inc). Mutual funds and other securities are offered through Qtrade Advisor and Credential Securities, a division of Credential Qtrade Securities Inc. Credential Securities is a registered mark owned by Aviso Wealth Inc.
Aviso Wealth Inc. (‘Aviso’) is a wholly owned subsidiary of Aviso Wealth LP, which in turn is owned 50% by Desjardins Financial Holding Inc. and 50% by a limited partnership owned by the five Provincial Credit Union Centrals and The CUMIS Group Limited. The following entities are subsidiaries of Aviso: Credential Qtrade Securities Inc. (including Credential Securities, Qtrade Direct Investing, Qtrade Advisor, VirtualWealth and Aviso Correspondent Partners), Credential Asset Management Inc., Credential Insurance Services Inc.,
Credential Financial Strategies Inc., and Northwest & Ethical Investments L.P.
The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This material is for informational and educational purposes and it is not intended to provide specific advice including, without limitation, investment, financial, tax or similar matters. This document is published by CQSI and CAM and unless indicated otherwise, all views expressed in this document are those of CQSI and CAM. The views expressed herein are subject to change without notice as markets change over time.
