Don't wait till you die: How to give kids the cottage now
An article in Saturday's Globe and Mail with the above-captioned title caught my eye. The author, Tim Cestnick, sends the message that "doing nothing - that is, refraining from certain transactions" - can often make sense in tax planning. To illustrate his point, he shared a story of Ruth, an elderly woman with a dilemma involving her cottage and her children.
Ruth owns a cottage that she rarely uses. The cottage was purchased for $50,000 in 1975, that same amount was invested in it over the years, and it is currently worth $500,000. Ruth decides to give the cottage to her two children. The problem? If she does so, she'll be deemed to have disposed of the property at fair market value, which could trigger a taxable capital gain and a potential tax bill of almost $100,000. That result isn't workable for Ruth, particularly as there will be no sale proceeds available to pay the tax bill.
While it was noted in the article that Ruth may be better off waiting until she dies to transfer the cottage to her kids (this will defer tax until that time), the fact is that she wants it transferred now for sentimental reasons. The solution? "Sell" the cottage to her children for fair market value in exchange for promissory notes. The notes will be worded such that Ruth will collect the proceeds over at least five years. This will allow Ruth to pay tax on her capital gain over a five-year period. As Ruth has no intention of collecting on the notes, she will make sure to forgive the promissory notes in her Will (which will have no adverse tax consequences).
This article illustrates how a creative approach tailored to a person's unique circumstances is often needed in tax and estate planning. Mr. Cestnick reminds readers to visit a tax pro if you hope to try this, and I would recommend consulting with an estate planning lawyer as well. You should also tune in to Ian Hull and Suzana Popovic-Montag’s recent pod-casts focusing on cottage properties.
Have a good day,
Natalia Angelini
