Q. My husband and I are retired, owning both a home in the city and a cottage up north. We are updating our will and want to leave our children the cottage when we pass away, but we don’t want to burden them with having to pay a large amount of taxes on the property. How can we leave the family cottage for the next generation in a tax efficient manner and ensure it remains in the family for future generations to enjoy? – Janelle P.
A. It is no longer possible for you and your husband to designate one property each as your principal residence. You can sell or transfer ownership of your principal residence to your children and designate the cottage as your principal residence, and enjoy the capital gains tax savings on both properties.
Life insurance is a cost effective way to provide liquid cash to pay capital gains taxes your beneficiaries may incur. Life insurance is purchased on the life of the owner or on joint owners of a cottage on a “joint-last-to-die” basis. Insurance proceeds are tax free to the beneficiary and avoid probate. This will provide immediate cash to pay taxes. In some cases, the intended beneficiaries of a family cottage may pay the insurance premiums. A potential downfall of this solution is that you and your husband must be in good enough health to qualify for insurance.
Another solution is to transfer the cottage into an “inter-vivos” (living) trust, especially if there is a small capital gain liability. The transfer of the cottage asset into a trust triggers capital gains. With this approach, ownership of the cottage is now in the trust and your family retains unlimited use of the property. If you and your husband are over 65 years old, an “alter-ego” or “joint-partner” trust can be used. There is no deemed disposition of the cottage when it is transferred into this newer type of trust.
Bev Moir is a Senior Investment Executive and financial planner with The Moir Team at ScotiaMcLeod, Toronto. ScotiaMcLeod is a division of Scotia Capital Inc., a member of the Scotiabank Group. Member Canadian Investor Protection Fund (CIPF).
This article is for information purposes only. It is recommended that individuals consult with a financial or tax advisor before acting on any information contained in this article. When discussing life insurance products, ScotiaMcLeod Investment Executives are acting as life underwriters representing ScotiaMcLeod Financial Services (Ontario) Inc. The opinions stated are not necessarily those of Scotia Capital or The Bank of Nova Scotia
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