This week on Hull on Estate and Succession Planning, Ian and Suzana discuss delegation issues that arise when dealing with Investment Accounts and address a listeners question about the family cottage.

Comments? Send us an email at hullandhull@gmail.com, call us on the comment line at 206-457-1985, or leave us a comment on the Hull on Estate and Succession Planning blog.

Posted on July 1, 2008 by Hull & Hull LLP

Suzana Popovic-Montag: Hi, and welcome to Hull on Estate and Succession Planning. You’re listening to Episode #119 of our podcast on Tuesday, July 1^st, 2008.

Welcome to Hull on Estate and Succession Planning, a series of podcasts hosted by Ian Hull and Suzana Popovic-Montag, that will provide information and insights into estate planning in Canada. From the offices of Hull Estate Mediation in Toronto, Ontario, Canada, here are Ian and Suzana.

Suzana Popovic-Montag:   Hi there, Ian.

Ian Hull: Hi Suzana.

Suzana Popovic-Montag: How are you today?

Ian Hull: I am great.

Suzana Popovic-Montag: That’s good.

Ian Hull: I think this podcast will actually be lodged into the internet through the mysteries of digital technology on Canada Day.

Suzana Popovic-Montag: Happy Canada Day everyone.

Ian Hull: Yes, big day here in Canada, and a big day for us as we continue our march towards our 200^th podcast. That’s our next benchmark, I guess, in some ways. We’re now at 119.

Suzana Popovic-Montag: Just a quick reminder to anyone who’d like to call in and give us feedback, comments on the show, please feel free to call us at 206-457-1985.

Ian Hull: And feel free, of course, to e-mail us at hullandhull@gmail.com, or jump on our webpage at hullandhull.com and surf around, find our blog, find all of the backup information that we tend to be using for a lot of these podcasts.  And we’re hoping to put more on where this summer’s project is looking toward trying to get some more video on there and certainly keeping the white papers on the website as well. 

So, before we begin our further analysis of the ever-pressing issue of investment accounts, when you’re putting together Court format accounts, I just wanted to talk about an e-mail that we received last week on our discussion about the prudent investor rule. And we got a great e-mail, again this is tied into some specific advice they were seeking so I’m just sort of summarizing what was being asked of us.  And the focus of the question was, just how much of a balanced portfolio do you have to maintain or how important is diversity when you have the main asset of the estate being the family cottage? And remember, we talked about the unique quality of a family cottage as an illustration of the escape clause that the Act and the Courts have allowed trustees to maintain an asset that, on the face of it, looks like it isn’t prudently being invested in the sense that it may be a wasting asset or it may be costing more than it’s making. And this person e-mailed us asking us what happens if it’s a fairly modest estate and you have essentially the bulk of the estate is indeed the family cottage? 

So it’s a tough question and one that, as all lawyers have to say because we are right when we say it, it depends on the facts and it depends on the circumstances. We didn’t get into any more detail on what this specific question was, but I’m going to add one layer onto that and that is, is that let’s say it is a trust for a surviving widow.  So in this case, a happily married couple, they have Wills that say all to the other in trust, and on the death of the final last person standing, everything to the child or the children, in this case there’d be two kids. So in that kind of scenario we have a surviving spouse, she’s 84 years old, the trust is only, and when I say only it’s made up of $900,000, $800,000 of it is the family cottage and $100,000 of it is cash. Well, in that kind of scenario, if the surviving spouse needs the money, then in that kind of situation it may be that the Court would say, you know what, you do have an obligation to diversify. Notwithstanding the fact that the two children are probably chirping away saying don’t sell the cottage, mom, it may be that that situation where, as a fiduciary, you have to assess it as being a unique asset certainly, but when you need cash, you need cash. So, again, it would depend on the personal circumstances of the surviving spouse and if she had her own wealth she may say, don’t worry, keep it. So that scenario works well, I think, as an illustration, because if the surviving spouse has their own wealth, and chooses to say to the fiduciary, don’t sell, then you’ve got some comfort to hang onto, it’s completely undiversified portfolio. But, if the surviving spouse says, I need the dough, then you’re faced with a difficult decision. And the third question would be, what about the children of the children, i.e., the grandchildren?  And what would the representative, the legal representative of the grandchildren, say about that diversification question?

Suzana Popovic-Montag: And that also raises, of course, the issue of the even hand rule and how a trustee has to maintain an even hand between the income and the capital beneficiaries of the estate. And I know we’ve talked, Ian, on previous podcasts a little bit about that rule as well as how a trustee would go about exercising discretion in light of the fact that the surviving widow either does or does not have her own assets in her own estate.

Ian Hull: And there’s that other layer, of course, that we’ve talked about, is that we’re not actually as a fiduciary allowed to ask the surviving spouse typically what they have or don’t have. So you’re hoping there’s some co-operation and some discussion that is frank and maybe outside the boundaries of what we’re allowed to ask. But I have seen cases where you’ve got the even hand rule tugging away at you and then, and that being basically, look, we’ve got to balance these three generations.  That this is the trust, the trust says look after the income beneficiary, the surviving widow, look after the children and keep in mind the grandchildren. So, I’ve seen cases where government agencies that monitor the grandchildren’s interest have insisted that that is not a diversified portfolio and that you have to seriously consider, notwithstanding the provisions of the Act, seriously consider selling the cottage. So really, from our perspective, I think what’s important to keep in mind is, if you keep, if you really want to keep a special cottage issue, or a chalet, or some recreational property, unique characteristic property, in a trust after you die, you’d better think through what all of the competing interests are going to be, and think through what the Court’s going to say to you. Because you may end up forcing the sale of this cottage property inadvertently, because of these competing interests.

Suzana Popovic-Montag: It really does underscore the importance of planning with proper professionals before these kinds of situations can unfold, so that you can sort of not predict but certainly try to anticipate the issues that can arise and perhaps creatively plan around that so that at the end of the day, you do have someone upholding what you ultimately intended to be your intentions.

Ian Hull: So I think that, anyway, I really appreciated the input from our e-mail participant on that one.  But it’s a good dovetail into the next concept I think that’s worth flushing out, because at the end of the last podcast, Suzana, you talked about this mutual funds and delegation and the kind of twists and turns that come up in the investment account environment. Let’s talk for a few minutes, if we could, about this concept of delegation first of all, and then dovetail it into this investment account problems that get created.

Suzana Popovic-Montag: And generally speaking, what we start with is the fact that as fiduciaries, we are somewhat restricted in terms of the level and the extent of delegation that we can make in doing our fiduciary responsibilities.  And one of the things that, in particular as I was saying previously years ago was a big issue with mutual funds, to what extent trustees could hire mutual fund advisors to actually help them administer these pools of funds and these assets.

Ian Hull: So when we say delegation, I guess we’re saying that we can’t hand off even the littlest jobs of any responsibility as a fiduciary. For example, signing a cheque. There is some authority that says that as a fiduciary we can ask someone else to give a Power of Attorney and ask someone else to sign the cheques. So in this situation, where we’re talking about delegation, we would say, hey we’ve got, the fiduciary is actually out of town most of the time but we’re running a bank account here. That fiduciary can delegate the job of signing the cheques probably.  but what he can’t do is delegate the decision-making to sign the cheque. So every time, say there was an income payment that had to be made and the fiduciary was out of town and their lawyer, for example, was in charge of sort of making sure the cheques went out once a month. Every time a cheque is written and signed, it has to be on the express instructions of the fiduciary. Now the fact that the lawyer, under a Power of Attorney, may sign the cheque is probably okay, but that’s a good illustration of what we say delegating. As long as you don’t give up the mental and the judicious decision to have the cheque signed, although you’re passing on the actual mechanics of it, you probably haven’t breached the delegation rule. Again, twists and turns, depends on the facts, but that’s an illustration of this delegation. And your example is the perfect one, because with a mutual fund, that was sort of like the ultimate delegation from a fiduciary standpoint, where you were a fiduciary, you handed $100 to an investment advisor and that investment advisor turned that money over, bought into different funds.  In the old days, they’d buy a bit of IBM, a bit of Bell Canada and you’d give them direct instructions. Well, with a mutual fund, of course, you’re handing it over to a further person, that is the fund manager of the mutual fund. So you give it to your investment advisor, who then hands it off to a fund manager.  And until the Act was changed in Ontario, there was some concern that that was essentially over-delegating. You had pushed out the decision-making too far. And it’s a really important point when you come to the expectations of the investment account which we’ll talk about more in our next podcast, but an important step. 

So in summary, we’ve got the old fashioned broker-client relationship untouched, but then we twisted it, we pushed it one step further and now we have some statutory protection to allow this sub-delegation, so to speak.

Suzana Popovic-Montag: And just to close the loop on that as well, we always underscore the importance of actually reading the documents and here the trust instrument or the Will, because that can be something that’s specifically planned for and language can be put into these documents that can authorize things over and above what the statute or what the common law itself provides for. So just another thing that we try to keep in mind in these situations.

Ian Hull: Well that’s great, Suzana. Hopefully we’ve had a good discussion on the question of delegation and certainly answered the question that came in from the listener. So thanks very much Suzana.

Suzana Popovic-Montag: Thanks to you, Ian and thanks to everyone who has joined us.   Again, just a quick reminder of our call-in number for any questions or any comments that you might have on the show, 206-457-1985.

Ian Hull: And any direct feedback, go to our blog at estatelaw.hullandhull.com or our e-mail at hullandhull@gmail.com. Thanks so much.

Suzana Popovic-Montag: Thank you.

You’ve been listening to Hull on Estate and Succession Planning with Ian Hull and Suzana Popovic-Montag. The podcast you have been listening to has been provided as an information service. It is a summary of current legal issues in estates and estate planning. It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.

To listen to other Hull On podcasts, or to leave a question or comment, please visit our website at www.hullestatemediation.com.

Our theme music is UpTempo14 by Gary and is courtesy of the Podsafe Music Network.

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This week on Hull on Estate and Succession Planning, Ian and Suzana discuss things to remember when drafting a co-ownership agreement of a recreational property with family or friends.

Click "Continue Reading" to read the transcribed version of this podcast.

Drafting a Co-ownership Agreement - Hull on Estate and Succession Planning Podcast #78

Posted on September 18^th, 2007 by Hull & Hull LLP

Suzana Popovic-Montag: Hi, and welcome to Hull on Estate and Succession Planning. You are listening to Episode #78 of our podcast on Tuesday, September 18^th, 2007.

Welcome to Hull on Estate and Succession Planning, a series of podcasts hosted by

Ian Hull and Suzana Popovic-Montag, that will provide information and insights into estate planning in Canada, from the offices of Hull Estate Mediation in Toronto, Ontario, Canada. Here are Ian and Suzana.

Ian Hull: Hi Suzana.

Suzana Popovic-Montag: Hi there Ian, how are you?

Ian Hull: Just great, I’m suffering through my allergies a little bit in the fall season, but no complaints.

Suzana Popovic-Montag: That’s good.

Ian Hull: Just before we start our podcast today, I thought I’d put a little plug in. I had a great opportunity to be interviewed last week by Donna Papacosta who is from Trafalgar Communications and many of us know her from her fantastic podcast, and she blogs as well. But her podcast called “trafcomnews.com”. Donna is someone I met at Podcasters Across Borders in June of this year. We had a great time, shared a couple of beers and some laughs and we sort of talked about each other’s podcasts. She is in the communications world and so since meeting her, I’ve been following her podcasts carefully and reading some of her blogs. She’s a PR communications specialist and the last few of her series of her podcasts have been helping teaching podcasts. And she tied it into the theme, going back to school and has given some great tips on how to podcast. So Donna’s a great friend from the social media world and I was honoured to be interviewed by her. And she was sort of curious about our world and what we were doing in our niche marketing and what we were doing from the podcasting standpoint. So it was a lot of fun.

Suzana Popovic-Montag: Well, that’s great Ian. I guess we’ll be looking for where that interview shows up. That’s wonderful.

Ian Hull: Yeah, I’m not sure when it’s coming in but she has to go back and, of course, edit everything I said and fix it up. 

So why don’t we, we’ve sort of got our own little mini-series going on here and that has been dealing with the cottage property or vacation properties. We just, in our last podcast, started to sort of talk about how we crafted the agreement. We talked a little bit about some of the things that we would want to include in the agreement, and not necessarily we don’t want to get into the drafting issues per se in the podcast, but some of the core concepts we may want to cover in the agreement itself.

Suzana Popovic-Montag: And just to sort of recap that, Ian, we were talking about, you know, creating a specific fund for maintenance and repairs or improvements that are going to be done to the property. We also talked about how we could go about implementing some terms perhaps for decision-making. And also the assignment of responsibilities within the context of that agreement.

Ian Hull: So let’s talk a little bit about one of the spicy issues whenever you’re sharing a recreational property, and that is, scheduling the use of the property itself.

Suzana Popovic-Montag: Ian, I think that the terms of this kind of arrangement, and particularly because it is the recreational property, should be set out as clearly as you possibly can, depending on whether or not you’ve got a trust or a co-ownership agreement.

Ian Hull: So, for example, before the beginning of each year, the various owners could draw straws for the use of the property at certain times. Or they could create a rotation so that each co-owner would be permitted exclusive use of the property for certain weeks.

Suzana Popovic-Montag: And I think the terms could even go so far as to provide that the rotation itself varies from year to year, over a cycle of years.

Ian Hull: So this drawing straws and rotation reminds me of the fact that us lowly Leaf fans here in Toronto get the chance every year, if we’re lucky enough.  I own a little part of season’s tickets and we have the same rotation and draw system that is involved. And we’ve tried to turn that into, we try to play a little game of golf, have a couple of beers after and laugh and make it a fun event. I say that sort of half tongue-in-cheek but also half seriously, because what you want to do is, because this issue can be a sensitive issue, you want to try to keep it as friendly and personable as you can and so you might want to turn it into, you know, getting together for a dinner, going through some of these issues, not just the scheduling issue, but some of these other issues and make sure there’s lots of wine and beer flowing.

Suzana Popovic-Montag: I’m sensing a theme Ian.

Ian Hull: Absolutely.

Suzana Popovic-Montag: Now, the terms of the agreement could also set out rules, I think, for others who might be using the properties. So, in addition to either the owners or the beneficiaries, if they want to consider an arrangement where other friends or other family members are either renting it or perhaps even using it for free.

Ian Hull: That’s a really good idea. You sometimes overlook that possibility and then you’re into the term of the agreement and you haven’t raised that as a possibility, that maybe a friend would come up or you may want to use your property week or weeks to generate your own income. Those can be sort of side issues that can be particularly problematic for some because some owners may not want to rent or they may not want strangers on the property. And so you may want to do your best to canvass that at the scheduling of the use of property meeting.

Suzana Popovic-Montag: That’s a good idea. I think a further thing that you’d want to consider when you’re entering these kinds of arrangements is to actually speak to what would happen in the event that someone defaults on whatever that they’re supposed to do pursuant to the agreement.

Ian Hull: That’s such a good point because when you have these arrangements, they are typically at a family friendly situation. And many of us don’t want to face the fact that what are the consequences of default and what sort of impact should there be felt by those who don’t follow the agreement, notwithstanding that some of them or more of them are family members.

Suzana Popovic-Montag: And just to give an example, I mean it would be something like if a co-owner is required to pay certain expenses to maintain the property and then suddenly they don’t do that, you want to speak to what happens in those circumstances when someone is not holding up their end of the bargain.

Ian Hull: So under a co-ownership agreement which we’ve talked about in the pats podcasts, there are more options for dealing with these kinds of contract defaults and more flexibility available.

Suzana Popovic-Montag: The terms could give the other co-owners, for example, the right to purchase the interest of the person who’s actually defaulting on his or her obligations.

Ian Hull: And that’s a good idea, because we recently were involved with a case where just that happened. And it wasn’t an unfriendly buy-out so to speak; it just turned out to be a situation that made the most sense for actually both parties. One, who was feeling the burden of ownership, needed the money for other reasons, and the other family member who really wanted to sort of consolidate the ownership group.

Suzana Popovic-Montag: And if you’re going to have that kind of provision in it, you want to make sure that the terms of your agreement perhaps even include some kind of formula that will somehow appraise the value of the person who’s actually defaulting his or her interest in the property, and whether or not, you know, you want to consider if there should be some kind of minority interest discount or something as well. So just yet another thing to sort of keep in mind when you’re drafting these kinds of agreements.

Ian Hull: Well, that minority discount is a good point and one that is often overlooked because, and again, because these are typically friendly and family situations. But in a business environment, if four people owned a recreational property and if one of them wanted to be bought out in a business environment, say you were a one-quarter shareholder of a corporation, typically the Courts would have found that you have a minority interest and therefore it is to be discounted to a certain extent, because by selling it, you’re only giving up…you’re not giving up control and so forth. In a situation where it’s a family friendly situation, if you don’t consider the minority discount issue at the outset, it can come as a big surprise if there’s three or four owners and Betty decides that she wants to buy out Bill. And Bill gets a big surprise that, because Betty, who is of course a merchant banker and knows all these things and says well, you know, of course, we haven’t talked about this Bill, but your third interest is well, it’s not quite worth a third. We’ve got a valuation, fine; I can live with that valuation. But it’s a minority interest and therefore it’s reduced to that extent. And you can really, you know, you can highlight this issue before and avoid the problems. Either agree that there will be no minority discount because it’s a special property, or agree what kind of formula you want to get into should a minority discount issue arise.

Suzana Popovic-Montag: And clearly, I think incorporating these kinds of consequences of a default in an agreement are so much more easier when you’re dealing with the co-ownership agreement, as opposed to a trust situation.

Ian Hull: Well, that’s right because, you know, the trustees in a trust situation, it adds a complication. And although we’ve talked about the different approaches to the co-ownership agreement or the trust agreement, trustees are considered fiduciaries. And the Courts are more willing to intervene in the operation of a trust than a co-ownership agreement. So that sort of fundamental premise needs to be kept in mind so that you either have flexibility or you don’t have flexibility, depending on the circumstances that you’re involved with.

Suzana Popovic-Montag: And if someone defaulted in the payment of expenses, this might actually be deemed to be a loan that’s owing by that person to the other co-owners or even the trustees.

Ian Hull: And the terms, again, you might want to provide that if the loan has not been repaid and other obligations of the defaulting person have not been brought into good standing within a certain period of time, make it time specific, again you want to consider certain remedies. What will be available to the trustees or if it’s a situation where it’s a co-ownership agreement, what’s going to be available to the co-owners? And again, you know, we’re always hesitant to do that because default in that means taking steps against typically a friendly situation, like a brother or a sister.

Suzana Popovic-Montag: Well, there certainly is a lot of flexibility and a lot of issues, I think, to keep in mind in these kinds of situations. And the fact that you at least can identify some of these issues can only help when it comes time to putting something, pen to paper essentially.

Ian Hull: Absolutely. Well I think that wraps up some more of our thoughts today anyway on the co-ownership agreements. And we’ve got a few more comments on that, that we may want to wrap up our podcast series with in the next podcast or two.

Suzana Popovic-Montag: That’s great. Thank you very much Ian, I’m going to go look for that interview of yours.

Ian Hull: Thanks Suzana.

You’ve been listening to Hull on Estate and Succession Planning with Ian Hull and Suzana Popovic-Montag. The podcast you have been listening to has been provided as an information service. It is a summary of current legal issues in estates and estate planning. It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.

To listen to other Hull On podcasts, or to leave a question or comment, please visit our website at www.hullestatemediation.com.

Our theme music is UpTempo14 by Gary and is courtesy of the Podsafe Music Network.

Arranging an Agreement on Cottage Property - Hull on Estate and Succession Planning Podcast #77

Posted on September 11^th, 2007 by Hull & Hull LLP

Suzana Popovic-Montag: Hi, and welcome to Hull on Estate and Succession Planning. You are listening to Episode #77 of our podcast on Tuesday, September 11^th, 2007.

Welcome to Hull on Estate and Succession Planning, a series of podcasts hosted by

Ian Hull and Suzana Popovic-Montag, that will provide information and insights into estate planning in Canada, from the offices of Hull Estate Mediation in Toronto, Ontario, Canada. Here are Ian and Suzana.

Ian Hull: Hello Suzana.

Suzana Popovic-Montag: Hi there Ian.

Ian Hull: Boy, it’s hot in the city these days. Very weird. We’ve just come out of the summer thinking it was going to go into the fall and a little cooler. And we had some weird weather last week but no complaints.

Suzana Popovic-Montag: And kids are all back to school, so it’s a great time of the year.

Ian Hull: That’s right, it couldn’t be busier. So it’s nice to sit back and take a deep breath, talk a little bit about some estate stuff, get recorded doing it. And on today’s podcast, I thought what we might do is just continue through our working theme of cottage property, recreational properties. I know on the last podcast we were focusing on at the end the fund for maintenance and repairs and improvements: (a) the importance of it and; (b) just some of the mechanics behind it. So, why don’t we just take that point and develop it a little further. Because this all ties into the agreement that works for everyone, and how you create the agreement that works for everyone. So what about the funds for maintenance and repairs and improvements?

Suzana Popovic-Montag: Well, Ian, just like any agreement or contract or arrangement, you want to make sure that the terms would set out how this fund is actually to be used, what for and maybe even consider listing specifically the certain types of maintenance and repairs that would be done out of the funds that are in this arrangement.

Ian Hull: That’s so important because you can sometimes get into a debate as to whether or not, say some part of the family comes up and they use the boats and kayaks and canoes and the other part of the family use it, the cottage, but they never touch the waterfront because they like playing baseball in the backyard or something. And then there’s a dispute as to, well who has to fix the boathouse when it starts to fall apart? So identifying that can be a really helpful tool.

Suzana Popovic-Montag: And you could also set out, I think in these kinds of arrangements, how different co-owners or the people that you have made or named beneficiaries of the cottage, could vote or agree or consent to certain major repairs or improvements being made.

Ian Hull: That’s a good idea because even if you try to document and list as best as you can, you’re going to miss something. You’re either going to miss a category or an event. And so then what you’re saying is you just throw in a mechanism that allows the group to decide beyond that.

Suzana Popovic-Montag: The terms, I think, would also have to address the fact that, you know, the reality that perhaps the fund that’s set up or the agreement that’s made, may not last forever. It may not be sufficient. And, you know, in those circumstances, you might want to consider what happens then.

Ian Hull: Absolutely, because then really what you have to do is set in a mechanism to start taxing the group of owners, in a sense, to keep the fund going. These maintenance funds for property are hard enough to set up, but it’s also hard enough to find the money at the front end to do it, especially when you don’t even know what to predict. If it’s going to be worth $2,000 a year in repairs, or is it going to be $20,000?

Suzana Popovic-Montag: That’s right.

Ian Hull: So one of the things that, you know, we have seen our clients do is literally create a formula that develops over the lifetime of the agreement, knowing that expenses will go up and knowing that they often, at the outset, the initial expenses can be heavy because maybe once you take the cottage over, or you buy the cottage from your parents, or whatever, you have to do the kitchen because the parents have not done anything with it for 30 years or something. So there may be some up front expenses that you can agree on. And then you’d want to just create this funding mechanism by saying every year, x% is going to come in from the fund from your own sourcing.

Suzana Popovic-Montag: And I think as a concept, that makes a lot of sense, and that’s why, you know, we can all agree up front that these kinds of things are necessary, we should be anticipating them. But unless you’ve actually, you know, put it pen to paper and somehow encapsulated that agreement, it just will open up the possibility for disagreements at the end of the day, I think.

Ian Hull: So, speaking of disagreements, how do we…we’ve said we’ve got the thing identified, we’ve got hopefully the categories. And if we’ve missed a category, we’ve got a mechanism to revisit the expense and how it’s going to be paid. What about the decision-making process though? Like, what sort of tricks and tips can we add to the agreement to help with that?

Suzana Popovic-Montag: Well I think, Ian, the terms should specifically set out how it is that these decisions are going to be made for the property. And if you’ve got a trust arrangement, for instance, it might be the trustees who are making all of the decisions. And if you’ve got more than one trustee, you have to decide if they can act either unanimously or just by majority. Those kinds of mechanisms where people can suddenly have a definitive answer being made by an identified group of people.

Ian Hull: And, you know, we can sometimes work outside the box a little bit and think about how you want to create this decision-making chain or process. And the terms of the trust can also provide that for certain matters, the consent of certain groups of beneficiaries, for example, possibly adult beneficiaries with a direct interest in the property, would have to be required. And so you have to…you’re forced to go to those who are directly going to benefit or it’s directly going to cost them, to get their consent before you can go put a new second floor on the cottage or something.

Suzana Popovic-Montag: And if you’re in a situation where you’ve got maybe a co-ownership agreement, then maybe that agreement itself can say that, you know, perhaps a majority of the owners are the ones that make the decisions.

Ian Hull: And that co-ownership agreement is, I think, one of the most important…it’s like the shareholders’ agreement in a good corporate situation. They are just such vital documents and if they’re done right, they are so effective.

Suzana Popovic-Montag: And I think in those cases, you know, you want to make sure that major decisions and things like, for instance, ultimately deciding to sell the property or an interest in the property, in that kind of situation you may want more than just a majority or you might want actually unanimous approval by all the owners, because it is such an important decision.

Ian Hull: And there’s also this twist that with these co-ownership agreements, and sometimes this idea is missed, is that you want to set out who will specifically act on behalf of minors who have an interest in the property. You’re almost what we call appointing a litigation guardian, so to speak. But you’re trying to anticipate that everyone who has a financial interest in the process is at least at the table and who are the representatives at the table. There’s some legal consequences of just randomly picking someone, putting it in an agreement. So we don’t want to worry about getting into the mechanics of that too much, but I just think that they have to dovetail that out too, and think about the minor children’s interests and how you’re going to deal with it on this. And again, we’re talking about major moves, like the sale of the property and the like.

Suzana Popovic-Montag: I think the agreement as well should speak, at least to some extent, about the assignment of responsibilities.

Ian Hull: That’s a great idea because the terms of the trust or the co-ownership agreement, if they set out who is responsible for dealing with the routine matters such as paying the bills and that, it can actually bring a lot of peace, because we all know in our own lives that, you know, typically in a situation where there’s a busy family, someone has to pick up the bills and someone has to deal with that issue. And if you don’t identify who’s got the sort of core things, if the pump breaks, who’s going to be looking after it, who’s going to take over, who’s got the connection to the handyman or however. And you might want to set those responsibilities right out in the agreement.

Suzana Popovic-Montag: And if you’ve got a trust, then usually it would be the trustees I think who would be the ones who are, you know, given the responsibility to do these things. And in perhaps a co-ownership agreement, it might be a particular owner who’s going to be given the responsibility for, as you say, paying bills or doing whatever is necessary to maintain that property.

Ian Hull: And when you’ve got a co-ownership agreement, as opposed to a trust, you can even, you know, take the load off the shoulders of the one family every year and, for example, set up rotating responsibilities for one of the co-owners from one year to the next, or maybe for a five year period. It is difficult, because sometimes you have to develop personal relationships with the people that are going to help fix the place or deal with you or your neighbours and so on. But sometimes people get angry about the fact that they’re doing all the work and so what you do is you agree to rotate the job.

Suzana Popovic-Montag: And I think specifically, you know, given that this is usually a recreational property, the fact that, you know, somebody is viewing themselves as having to do more than others to enjoy the property, could lead to that tension. So actually building in some kind of mechanism, or at least turning your mind to the possibility, is a great idea.

Ian Hull: Okay, well I think there’s some more ideas that we have on the whole, well the terms of the trust or the terms of the co-ownership agreement, we can talk maybe about in our next podcast, about scheduling the use of the property, talk about the consequences of defaults should they occur, and some of the other ramifications that you may want to consider in the context of a co-ownership agreement. So why don’t we save that for our next podcast and thanks very much, Suzana.

Suzana Popovic-Montag: Thanks to you, Ian.

You’ve been listening to Hull on Estate and Succession Planning with Ian Hull and Suzana Popovic-Montag. The podcast you have been listening to has been provided as an information service. It is a summary of current legal issues in estates and estate planning. It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.

To listen to other Hull On podcasts, or to leave a question or comment, please visit our website at www.hullestatemediation.com.

Our theme music is UpTempo14 by Gary and is courtesy of the Podsafe Music Network.

Posted on August 28^th, 2007 by Hull & Hull LLP

Suzana Popovic-Montag: Hi, and welcome to Hull on Estate and Succession Planning. You are listening to Episode #75 of our podcast on Tuesday, August 28^th, 2007.

Welcome to Hull on Estate and Succession Planning, a series of podcasts hosted by

Ian Hull and Suzana Popovic-Montag, that will provide information and insights into estate planning in Canada, from the offices of Hull Estate Mediation in Toronto, Ontario, Canada. Here are Ian and Suzana.

Ian Hull: Hi Suzana.

Suzana Popovic-Montag: Hi there Ian.

Ian Hull: So, you know, having some fun with this whole cottage issue and talking a little bit about solutions instead of just about problems.  You know one thing that arose recently on a file that I thought was interesting and something that we’ve talked a little bit about this, but a real life example of what’s happened was we were in a situation where it was a relatively friendly transition of the family cottage. And lo and behold, what happened was, as we were going to deal with it, the actual title documents hadn’t been looked at for a long time. The father had died.  I’m sorry, the mother had died about thirty years ago and the father had lived in the cottage and shared it with his kids and grandkids and enjoyed it. And then the children and the grandkids came up with a solution as to how to deal with the cottage before the father died. And father was happy with the solution. And then they went to deal with it and this was a property that was north of North Bay and it was particularly problematic in terms of the title holding. And it hadn’t been dealt with for thirty years prior and had never been dealt with. So interesting enough, and that’s fine, the lawyers stepped in and they figured out, smart real estate lawyers figured out how to, you know, transfer the one property and part of it had be severed.  And there was a whole bunch of interesting legal issues. But what happened was, in the interim, when the kids, they had gelled with the solution, and then the delay which was partially the process in the system, in between the delay which took about eighteen months to clear up some of the title problems, two new kids were born into the loop.  And one of the kids had gone offside on the deal.  

So we had to go back and rework the deal, revisit almost all of the issues that we thought we’d resolved. And then ultimately, we came up with a solution.  But, I just thought it was an interesting point to make in the sense that when you go into these things, often people roll their eyes when the lawyers say, well let me see what’s involved, per se.  Do you own all of the property you’re owning?  Or who owns it and does your great-grandfather still have some estate that we have to deal with to transfer it in? Because when you go to move on these things, it’s like anything in a business deal or on any transactions. They, no matter what, life is transaction based.  And when you’ve got a deal, you wanna crystallize the deal, move forward. And then when you hit a stumbling block like this and you can’t give people the tangible result that they thought they had achieved, things loosen up. 

And in this case, things loosened up to the point where it wasn’t destructive, but it was harmful.  Because again, some of the hard feelings and things were raised again. We were just reinventing the wheel in some level. So I’ve, you know, I wasn’t involved in the early part but we learned a good lesson that it’s really important to get a handle on the true ownership interests of, in this example, the cottage property, what properties exist where, what slices of land are appropriately to go where and who owns them and what’s the history behind them. And you can do that by working concurrent with the plan.  When we get the family together and we want to work through the transition, we often will say, well let’s start from ground zero here, make sure we’re at the right spot, the starting spot, leave that to the lawyers and we’ll deal with that concurrent with our efforts to work with you in terms of the solution. 

Suzana Popovic-Montag: Ian, that’s a great story and it sort of brings to mind a story that I’ve encountered as well in the past where the ownership is not by the individuals but by corporations and private corporations owned by the individuals. And, you know, we know with family companies, people sometimes get lazy with the formalities that are required in these kinds of situations.  So directors, you know, they’re not always in place, the by-laws are not always up-to-date and the resolutions aren’t necessarily in place. So that, at the end of the day, when some form of transfer of ownership has to take place, it really can become a nightmare procedurally and at law, where by, you know, like you say, the possibility of actually losing an otherwise simple, deal can really become a reality.

Ian Hull: And one interesting thing on this, just to follow up on that too was, in the situation that I was involved with, was one of the brothers actually owned a sliver of the land and that brother had died without kids. So it added a whole twist on it and it was, everyone knew he was dead and everybody knew he had no kids.  But what we had, it added a whole twist in terms of regularizing things.  And again, it just comes back to doing your homework, if you’re gonna start the process, start early. And one of the things that I often will say to my clients, if they’re in the business of wanting to transfer, whatever it is, say it’s the cottage, the family business or whatever, start the succession plan the day you buy the business or the day you start the business or the day you buy the cottage. And start thinking through that, if that’s the goal, one of your goals, even if it’s a modest property, you never know.  I mean, people who bought cottages in Ontario and Northern Ontario in the early ‘60s and late ‘60s, early ‘70s, had no idea what these cottages would be worth today. And so you want to factor in that possibility of a transition.  Because if you buy the cottage now and you set it up in some elaborate trust arrangement for tax driven reasons, that may not be what you want to do ultimately in the sense that maybe you’ll save some tax, but you may not achieve your goal of succession. 

So talking about succession with family cottages, let’s talk a little bit about some of the basic ideas of just what we can do, transferring the cottage on your death and what steps can be taken.

Suzana Popovic-Montag: Well Ian, during our last podcast, we talked about, you know, those situations and what you would do in the situations where you were really concerned about the tax consequences of the transfer. But if the tax issues aren’t necessarily a concern for you or you’ve somehow already covered the tax liability through perhaps life insurance or some other arrangement, then you’ll likely choose to transfer your cottage or your vacation property on your death.

Ian Hull: Yeah, and that’s the likely scenario.  I mean, you know, the elaborate schemes of doing things during lifetime and things like that that we talked about before are useful and they’re worth considering. And even some of the creative schemes of passing on partial ownership and so on. But what 90% of estate planning is death-based in the sense that it’s triggered on the death. And so let’s start to flesh out some of what are the more conventional ways because there are so many ways that transfer options are available. Each with different potential benefits and really depending on your family’s current situation and future situation and prospects.  So let’s start with, let’s just talk through some of these options that are available upon death.

Suzana Popovic-Montag: Well, one of the ones that easiest comes to mind, Ian, and one that probably most people are familiar with is the concept of joint tenancy. And what joint tenancy means is that you can decide to hold your property jointly with someone else, for instance, your children or your grandchildren or some other family members who then are the joint beneficiaries of that property. And so then on your death, there’s an automatic transfer of that property to the surviving joint tenant or tenants.

Ian Hull: Now once that’s property transferred though, it passes directly to the other joint tenant on your death.  And, of course, there’s this benefit in Canada of the no capital gains are triggered necessarily depending if it goes to, for example, a spouse. If you have a joint tenancy with your cottage and it transfers to your spouse, then there’s a rollover on the tax payable. If it goes to a joint tenancy with a child, then there is no rollover available and you will crystallize part of that gain at that time. But another nice benefit is the fact that you’ll avoid probate fees likely when you pass through this joint tenancy process. 

Suzana Popovic-Montag: Now if we put on our litigators’ hat, though, Ian we certainly know that this option which is very frequently used, can however have some very complicated results or exceptions to it that often do lead to disputes.

Ian Hull: And we’ve certainly, on previous podcasts, talked about how the Supreme Court of Canada talked about joint accounts.  Well, in some ways, this is a similar scenario. And that is, what comes right down to it when you get into these disputes, is the court wants to know who really owns the asset.

Suzana Popovic-Montag: And that fundamentally is based upon what was intended at the time that the property was transferred.

Ian Hull:   And another, I guess, not to be naysayers, but another downside of joint tenancy arrangement is that if any of the joint tenants pre-decease you, their interest automatically, of course, passes to the other joint tenants. Which means that their children or other beneficiaries may not receive any of their interest in the vacation property.  And the classic illustration is if you have three children and you put your cottage in the name of yourself and the three children and your spouse having died, say a couple of years earlier. Three healthy adults and yourself.  they’ve got their own kids, you think this is gonna be a perfect estate plan. Well, if that person then tragically dies before you and you’re looking at a situation where a whole string of their children may not take the cottage.  And then you sit, you know, when you talk about these things, you say, oh gosh, nobody would do that to the grandchildren and to the nieces and nephews. But if it’s been a long period of time and certainly, in my experience, is, is that not that they’re estranged, but they’re distant typically. And so, you know what, the linkage to them and the importance of preserving their Mom or Dad’s, you know, inheritance that way on a gratuitous basis without being properly setup legally, it wanes.

Suzana Popovic-Montag: That’s for sure, Ian and we certainly can attest to that. You can also choose to give away your vacation property or your cottage property in your Will by either an outright gift or even a trust.

Ian Hull: And in most cases, the beneficiary of the property will have to wait until the Will is probated and you pay probate tax and capital gains tax on the receipt of that gift.

Ian Hull: But there’s exceptions to all of these taxes and you really need to sit down with a lawyer and determine if gifting by Will is the right answer. Alright, well, why don’t we, we’ve got some other suggestions to talk about and we’ll save them for our next podcast, that start to sort of flush out these options of transferring the cottage property on death.

Suzana Popovic-Montag: That’s great, thanks Ian.

You’ve been listening to Hull on Estate and Succession Planning with Ian Hull and Suzana Popovic-Montag. The podcast you have been listening to has been provided as an information service. It is a summary of current legal issues in estates and estate planning. It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.

To listen to other Hull On podcasts, or to leave a question or comment, please visit our website at www.hullestatemediation.com.

Our theme music is UpTempo14 by Gary and is courtesy of the Podsafe Music Network.

Posted on August 21^st, 2007 by Hull & Hull LLP

Suzana Popovic-Montag: Hi, and welcome to Hull on Estate and Succession Planning. You are listening to Episode #74 of our podcast on Tuesday, August 21^st, 2007.

Welcome to Hull on Estate and Succession Planning, a series of podcasts hosted by

Ian Hull and Suzana Popovic-Montag, that will provide information and insights into estate planning in Canada, from the offices of Hull Estate Mediation in Toronto, Ontario, Canada. Here are Ian and Suzana.

Ian Hull: Hi Suzana.

Suzana Popovic-Montag: Hi there Ian, how are you?

Ian Hull: I’m fantastic.

Suzana Popovic-Montag: That’s good.  Are you enjoying the summer?

Ian Hull: Yeah it’s good.  It’s, you know, it’s been a lot of fun and the weather has been good here in Toronto.  And a little hot in downtown Toronto a few days, but managed to get up to a cottage from time to time.

Suzana Popovic-Montag: That’s good.

Ian Hull: Speaking of cottages, let’s continue on with our discussion about cottages.  I know our last podcast, we talked about the cottage experience and really just sort of planning steps. Talked a little bit about what we needed to know about capital gains taxes.  Used that illustration, which is important, where we broke down, if we recall, there was a sale price of $600,000.  We took the adjusted cost base of $80,000.  Got it to the capital gain of $520,000 and then the tax payable on that broken down to about $117,000 to $120,000 in tax. Just to remind us because that was sort of our starting point, as to what do we do about this $120,000 tax payable either on death or before.

And we talked a little bit about the multiple uses that we have in managing this tax and this overbearing amount that has to be funded quickly, either after the transfer or after death. So we used a couple of examples too, about transfers during their lifetime.  And we talked about the gifting approach. And we got through part of the sale idea. But let’s just recap the sale option and maybe work through it a little more carefully.

Suzana Popovic-Montag: It’s a good idea, Ian, because when we were talking, we said that, you know, one of the options available in the circumstances, if the tax liability is going to be too high, is to consider actually selling the property to your family during the lifetime. Because at that point, your going to crystallize the tax liability to you and then deal with setting up any future gains which would then fall to your children or whoever you ultimately leave the cottage to at the end of the day.

Ian Hull: And we crystallized the tax at that point and that really gives you some certainty, both within your own estate planning standpoint and it allows you to not feel the burden of a major tax hit that’ll need to be paid down the road. So one of the things that I’ve experienced is that if you can afford a recreational property, maybe you can afford to give it away earlier or sell it earlier to the next generation. Maybe you can afford to pay the tax early.  And I know that sounds sort of counter intuitive because we live our lives trying to defer tax as long as possible. But in so doing, we also defer the issue.  And it may be that now, while you’re alive, it’s better to deal with it, both from a financial standpoint and from an emotional standpoint and managing the family sort of circumstances. For example, a sale of the property at fair market value to one of your kids might be the answer to bring the whole issue forward.  And it can be a useful tool from an estate planning standpoint. You weigh that against the fact that you’re not doing the classic “defer the tax until you absolutely last moment in time can”. And that’s a balancing I think you’ve got to decide whether it works better or not for your family.

Suzana Popovic-Montag: I think another option to sort of keep in mind too is that if you find that the possibility of having to pay the capital gains tax immediately is gonna pose too much of a cash flow problem to you, then you might consider some, you know, fancy estate planning or inter vivos planning in terms of selling or gifting the property in installments over a period of years, as opposed to just an outright sale at one point in time.

Ian Hull: So how does that work?

Suzana Popovic-Montag: Well, what would happen, Ian, is that a portion of the property would be transferred each year and then the capital gains tax payments would then be spread out effectively over a longer period of time.

Ian Hull: So that’s a more complex way of dealing with the sale, but maybe manageable, more manageable financially.

Suzana Popovic-Montag: And you could alternatively maybe consider selling the property and then taking a mortgage back from your family as consideration if, you know, there’s a fear that they wouldn’t necessarily have enough money to fund the purchase. Then you could set up an arrangement where you’re taking a mortgage back with or even without interest.  

Ian Hull: Okay, so…but what happens if you take the mortgage back and you sell it to your son and you take a mortgage back and there is no interest.  Does that create problems though?

Suzana Popovic-Montag: It could because you could be, you know, viewed by CRA, the tax authority, as doing a preferential share which might have some negative consequences to the family members.

Ian Hull: Right, because if the mortgage, if it bears interest, you have to declare the interest on your tax return even if the interest isn’t paid. So I know CRA will typically just attribute a value, the typical going rate for a mortgage would be “X” dollars and they’ll just attribute that as income to you.

Suzana Popovic-Montag: That’s right.  It’s going to be accrued as opposed to a cash paid basis. 

Ian Hull: Alright, what about another option entirely outside of this.  And maybe a bit outside of the box of what we’ve been talking about, but a living or an inter vivos trust?

Suzana Popovic-Montag: Well, Ian, if you want to transfer future gains in the hands of your children now, but you’re not really ready to give up the control of the property, then one of those options is, as you say, this living or inter vivos trust arrangement.

Ian Hull: So much like a gift of property though, the transfer itself into the inter vivos trust, into the living trust, will trigger an immediate taxable capital gains liability.

Suzana Popovic-Montag: But you can have the structure of the trust set up so that you can maintain control of the property during your lifetime and then have the control pass to your children on your death.

Ian Hull: So again, with no immediate tax liability to them in terms of probate capital gains or Land Transfer taxes, but you can manage the control issue and the tax issues in this living trust arrangement.

Suzana Popovic-Montag:   That’s right.  And that’s one of the benefits of that is, is as you say, the control. Like, you’re dealing with the property, you’re effectively, you know, crystallizing the tax liability, paying it, but you’re not losing necessarily the control over the property.  You can still go to it when you choose to, that kind of idea.

Ian Hull: So another sort of twist on this living trust idea is that the terms of the trust itself could provide a fund for maintenance and repairs to the property.

Suzana Popovic-Montag: And if you do think about setting up this kind of fund, you want to include in that terms that are going to allow the fund to actually grow over time. So that you do in fact provide a sufficient maintenance fund in the future.

Ian Hull: So it’s sort of like a living trust within a living trust.  We’ve got, maybe you put the property into one trust and then you throw some cash into another trust so that it can generate enough money to pay the expenses over time, and that way perpetuate the ownership of the trust into the next generations without being a tremendous financial burden on the next generations.

Suzana Popovic-Montag: That’s right, Ian.  That’s certainly the idea and, you know, we’ve seen many of those kinds of arrangements put into place quite effectively.

Ian Hull: So, again without being too overly tax technical about this, what’s one of the disadvantages of the living trust from a tax standpoint?

Suzana Popovic-Montag: Well from that perspective, one of the problems with the living trust is that all the income and the taxable capital gains are going to be taxed out.   What they call that top marginal rate.  And so the capital gain that, you know, likely wouldn’t be realized until the property is actually sold, but any income that’s going to be generated from investing that maintenance fund is going to be taxed still at that highest rate.

Ian Hull: You know and another issue I was thinking too with trusts is that all the property in the trust is deemed to be sold every twenty-one years for capital gains’ purposes. So that, in and of itself, creates us a new layer of bureaucracy in terms of the management of the trust itself. You’re always going to be triggering this capital gains every twenty-one years, so you’re not going to be able to avoid forever the capital gains within the trust.

Suzana Popovic-Montag: It is generally, though, possible to roll out the property to the trust beneficiaries at the cost base and then avoid any kind of deemed disposition. But that effectively means that the trust then has to be wound up.

Ian Hull: If you’re sixty-five years or older, you also could consider getting into the whole sort of realm of setting up an alter ego trust or a joint partner trust or some of the new sort of trust arrangements and transferring of property arrangements that exist in the estate planning world.

Suzana Popovic-Montag: And what would the advantage of that kind of arrangement be, Ian?

Ian Hull: Well if you are over sixty-five and you meet a certain criteria that the CRA will insist on, this will avoid the capital gains being triggered at the time of the transfer. So you are essentially rolling it into a trust that doesn’t trigger the capital gains, but your heirs, your ultimate beneficiaries, will have to pay the tax on your death.

Suzana Popovic-Montag: So it’s really a deferral it seems, then.

Ian Hull: Yeah.

Suzana Popovic-Montag: And I guess, you know, in those circumstances, you’d be looking to a lawyer to help you deal with these complicated rules that surround these different kinds of trust arrangements and agreements. So that you can come up with some kind of structure that works really to your best advantage, whether that is, you know, crystallizing and paying the capital gains tax now or deferring it to a later point in time or deferring it even to the time of your death.

Ian Hull: Well I agree and, you know, sort of as we wind up today’s podcast, I just…we kind of harkened back to what we sort of see time and time again in estate planning and that is this struggle between dealing with the payment of tax versus dealing with the right, and I say right, the proper maybe, estate planning for the benefit for your family. And the tax benefits don’t always equal the estate planning benefits. The family benefits, the idea that, you know, you want to keep harmony and you want to keep balance within the family.  And if you are governed, and this is sort of we’ve gone through these examples so far just in this example, if you’re governed by tax avoidance or tax deferral in your estate plan, it can be treacherous because there are so many other factors to consider. And if you have the financial resources for the recreational property, it may be that you should step away from the tax liabilities and exposure and start thinking about dealing with these properties, with your family in mind, not the tax person in mind.

Suzana Popovic-Montag: That’s some pretty sound advice, Ian.

Ian Hull: Alright, well listen, thanks very much Suzana and we will go back out into the world of lovely summer here in downtown Toronto.

Suzana Popovic-Montag: Thanks to you Ian.  I look forward to our next podcast.

You’ve been listening to Hull on Estate and Succession Planning with Ian Hull and Suzana Popovic-Montag. The podcast you have been listening to has been provided as an information service. It is a summary of current legal issues in estates and estate planning. It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.

To listen to other Hull On podcasts, or to leave a question or comment, please visit our website at www.hullestatemediation.com.

Our theme music is UpTempo14 by Gary and is courtesy of the Podsafe Music Network.

Posted on August 14^th, 2007 by Hull & Hull LLP

Suzana Popovic-Montag: Hi, and welcome to Hull on Estate and Succession Planning. You are listening to Episode #73 of our podcast on Tuesday, August 14^th, 2007.

Welcome to Hull on Estate and Succession Planning, a series of podcasts hosted by

Ian Hull and Suzana Popovic-Montag, that will provide information and insights into estate planning in Canada, from the offices of Hull Estate Mediation in Toronto, Ontario, Canada. Here are Ian and Suzana.

Ian Hull: Hi Suzana.

Suzana Popovic-Montag: Hi there Ian, how are you?

Ian Hull: I’m just terrific thanks.

Suzana Popovic-Montag: That’s good.

Ian Hull: We have been working our way around this potentially thorny issue of the family cottage.  And while we have not pretended for a moment that we have great tax expertise, we wanted to today talk a little bit about the capital gains tax, what you need to know about capital gains taxes and some of those issues relating to the family cottage.

Suzana Popovic-Montag: Ian, you might recall during our last podcast, we were talking about the fact that family dynamics and emotions play such a strong role when we deal with these cottage issues in estate litigation matters. But I think that next to that, that family dynamic component to it, the other most significant issue really is the capital gains taxes that arise from these kinds of recreational properties.

Ian Hull: And while you can buy or sell your principal residence, the home or the condominium that you might live in without paying capital gains taxes in Canada, on that increased value, you do have to pay capital gains tax on secondary cottages, properties such as the cottage or the chalet or other recreational properties. 

Suzana Popovic-Montag: The key exception, though, is when you actually leave this property to your spouse, so that the taxes in that case are actually deferred until your spouse dies. And I know that this is referred to as a spousal rollover.

Ian Hull: But except for that exception, if your vacation property has appreciated in value and your estate may, of course, face a significant tax bill. What we want to talk about a little bit is, you know, what if that tax liability isn’t covered.  What do we do?

Suzana Popovic-Montag: And Ian, do you think it would be helpful maybe just to talk a little bit about how that capital gains calculation is actually done on a property?

Ian Hull: For sure, because let’s just use an illustration.  Because, of course, if your beneficiaries have to sell the property to pay the taxes, then your estate plan may not be exactly what you had hoped it to be. So here’s an example of how you might calculate a capital gains tax on a property.

Suzana Popovic-Montag: So if you start, let’s say, with a property that was purchased back in the 1970’s.  Let’s say that the cottage was actually bought for $50,000.

Ian Hull: So in 1985 though, of course, you’ve had to spend some money upgrading.  And let’s put a number of, say you paid $50,000 for the cottage and you spent by about 1985 about $30,000 in upgrading it, putting a little addition on it and that sort of thing. 

Suzana Popovic-Montag: And then you look at what the property is actually worth the day you want to sell it and that’s the fair market value of the property.  And let’s suppose that now the property has been very successful in appreciating in value and now it’s worth $600,000. 

Ian Hull: So you take the sale price of the $600,000 and then you take off from it what we call the adjusted cost base.

Suzana Popovic-Montag: And that adjusted cost base is comprised of, you know, what that property actually cost you when you originally bought and what value you’ve added to it since you purchased it. And that, in our example here, we talked about the $50,000 being the purchase price and the additional, you know, upgrades to the property of $30,000, for a total of $80,000 in terms of the cost base of the property.

Ian Hull: So you’re allowed to deduct that cost base off the $600,000 sale price, leaving you with a resulting capital gain, not a capital gains tax, but a capital gain of $520,000. 

 Suzana Popovic-Montag: So since you’ve purchased that property, it’s technically appreciated in value by, you know, $520,000. And so if you look at the current capital gains tax rules, at least here in Ontario, 50% of that increase in value, that capital gain, is gonna be taxable.

Ian Hull: So just using our example here, remember we said that there was a capital gain of $520,000, 50% of $520,000 would be $260,000.

Suzana Popovic-Montag: And that $260,000 then becomes taxable at your highest marginal tax rate.

Ian Hull: So if the highest rate, for example, would be 45%, you’d have to pay a tax of $117,000 in capital gains tax.

Suzana Popovic-Montag: And that, of course, raises the question at the end of the day as to whether or not your estate has sufficient cash to pay that tax liability without maybe having to sell that property or coming up with the cash some other way.

Ian Hull: ‘Cause if not, you’re potential heirs and the family could lose what is often a cherished asset that you never intended to have sold on the day of your death. 

Suzana Popovic-Montag: But the good news, though, is that, you know, with some advance planning, turning your mind to these possibilities and the fact that this could arise, you can actually arrange to cover that anticipated tax liability with some creative estate planning.

Ian Hull: Alright.  Why don’t we talk about those?  And let’s start with the first.  You know, we’ve got to really essentially manage the taxes.  So the first idea is, and we’ve used this example in the past, is the idea of life insurance. 

Suzana Popovic-Montag: And life insurance, Ian, really is one of the most I’d say straightforward methods of trying to cover your vacation property tax liability when you die. Because what you’re doing is you’re purchasing life insurance for that very purpose.

Ian Hull: So your estate would receive as a death benefit, a tax free death benefit, the life insurance proceeds. And those proceeds can be used to pay the capital gains tax liability and any other administrative fees and expenses that are associated with settling your estate.

Suzana Popovic-Montag: And the clearest advantage of that then is that you have the comfort of knowing that your family’s not going to have to sell your cottage or your vacation property and that at the end of the day, they’ll actually receive a larger estate.

Ian Hull: Now in terms of managing taxes, there’s another sort of series of steps that you can think of.  And we sort of qualify them under transfers during your lifetime.

Ian Hull: And so Ian, as you say, it’s another way of actually managing the issue by proposing to deal with your property during your lifetime as opposed to transferring it on death. And it has some advantages do that kind of operation as well.

Ian Hull: So besides selling the property maybe to your family members outright, there are several ways to consider transfers during your lifetime that will help manage the tax.

Suzana Popovic-Montag: And one of the clearest examples that comes to mind is actually gifting the property to the people you intend to get it.

Ian Hull: Another example is making one or more of your children joint owners of the property with you.

Suzana Popovic-Montag: Or even by transferring the property to a trust where you can actually name your children or the other family members as beneficiaries of that trust.

Ian Hull: So if we step back with these three different options and we’ll work through these in some detail. But all three options will trigger an immediate capital gain in your name.

Suzana Popovic-Montag: So when you do transfer the property during your lifetime, suddenly that tax liability is gonna be crystallized and it’s gonna be your responsibility as opposed to that of your beneficiaries.

Ian Hull: Alright.  Let’s turn to the gift idea.  So if you can afford to pay the capital gains tax yourself that’s been accrued to death, and we’ll come back to our example before.  It’s a significant number, it’s $117,000 on what is a $600,000 property. And you can afford to pay that capital gains now and you want to sort of defer the future gains to the next generation.  You may want to consider gifting the property to your children.

Suzana Popovic-Montag: And the effect of gifting the property really is to trigger an immediate capital gains tax that, as we said, you know, would be your responsibility to pay that, which is gonna be taxable in your hands.

Ian Hull: So the long and short of it is you gift it, you pay the tax, you better have the dough at the time you’re gifting it or else this plan doesn’t really work. 

Suzana Popovic-Montag: The good news, though, is that the future capital gains on that property, so if it continues to appreciate in value, that future gain is going to be the responsibility of your children.  And it’s not going to be taxable until they in turn either die or sell the property. So your death is not going to trigger any tax liability to them.

Ian Hull: So an added bonus is that Land Transfer Tax…there’s an extra tax that often applies when you transfer properties.  But it doesn’t apply when there’s gifts and when there’s an estate in that situation. 

Suzana Popovic-Montag: And there’s the added benefit also to your estate of avoiding probate fees at the end of the day which, you know, in most provinces here in Canada, are payable based on the value of your estate.

Ian Hull: Alright, let’s turn to the idea of a sale.

Suzana Popovic-Montag: Well, Ian, you can certainly choose to sell your property to, you know, a non-family member or even family members during your lifetime.

Ian Hull: So if you do this, it is usually best to sell the property at fair market value from a tax standpoint.

Suzana Popovic-Montag: And why do you say that Ian?

Ian Hull: Well because you’ll still be charged the capital gains tax on the full market value even if you sell it for less. So if you try to give your child a benefit of a lower price then the differential between the actual fair market value and the lower price that you give to your child will be taxable like the gift that we just talked about.

Suzana Popovic-Montag: And in addition to that, the adjusted cost base that we talked about, you know, the original cost of the property plus any value that you’ve added to it, that adjusted cost base is going to be what your family members are going to be presumed to have paid for it. And it’s not the fair market value that they’re going to have attributed to them.  So they could possibly end up paying a hefty capital gains tax bill down the road.

Ian Hull: So you’re sort of, you know, you don’t get that far ahead if you try to do the sale route from the tax standpoint. But anyway, why don’t we at this point, wind up our podcast for today.  We’ve touched on some of the issues and there are more issues to address in the context of the transfer of the cottage property and we’ll save those for our next podcast.

Suzana Popovic-Montag: Okay.  Well thanks very much, Ian.  I look forward to our next podcast.

Ian Hull: Thanks Suzana.

You’ve been listening to Hull on Estate and Succession Planning with Ian Hull and Suzana Popovic-Montag. The podcast you have been listening to has been provided as an information service. It is a summary of current legal issues in estates and estate planning. It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.

To listen to other Hull On podcasts, or to leave a question or comment, please visit our website at www.hullestatemediation.com.

Our theme music is UpTempo14 by Gary and is courtesy of the Podsafe Music Network.

As the title of the conference may suggest, topics included geriatric care, consent and capacity matters, guardianship issues, estate planning techniques, as well as developments in the law of trusts and trustee liability, solicitor’s negligence and charity law.

Two of the lecturers offered an interesting discussion on the various ways the family cottage may be transferred from parents to children and the estate planning implications of each technique.

One particularly interesting practice that was discussed is the use of a co-ownership agreement.

Essentially, a co-ownership agreement allows parents and children to amicably share the family cottage during the parents’ lifetimes, and also creates a structure for the future use of the cottage after the parents pass away. While co-ownership agreements are not without problems, if drafted correctly, they may address certain issues that typically arise with family cottages; namely, tax implications, the cost of repairs and maintenance,  who gets to use the cottage and most importantly, when. These issues and are often the subject of family battles and can result in litigation.

Whether a co-ownership agreement is appropriate depends on the circumstances of the estate in question. There are many other estate planning tools available for transferring the family cottage, which have their own advantages.

Thanks for reading.

Jason