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Family Cottages (The Downside) Part 2
Michael E. Cobb
Michael E. Cobb
Michael E. Cobb
Mike is a founding partner in the firm and brings a wide range of knowledge of the real estate market in southern Ontario.

In my previous article in the September 9, 2008 Times-Reformer, I pointed out some issues that families have to deal with concerning the "Family Cottage". Again, cottages are a great tradition in Canada but they can be the source of much conflict, particularly when mom and dad are getting up in years and want to transfer it to the next generation. Also, I alerted the readers to the importance of understanding the income tax issues. Finally, I mentioned the alternative setting up a "cottage trust" and promised to try to shed some more light on this option as well as others. Cottage trusts can be a mine field and should only be done after a careful review of the pros and cons with an accountant and a lawyer. It should not be done in a casual way without the parent(s) and children understanding the legal effect and what has to be done to comply with the legal requirements, including the Income Tax Act. I recently had some involvement with one and it was very obvious that neither parent had a clue as to what the trust involved and what the legal requirements were. When the last parent passed away, the children were equally in the dark and in attempting to deal with it, major rifts developed between them. Frankly, I prefer a change in ownership either during the lifetime of the parents or upon their death. In either case, it is very important to make sure that the inevitable income tax obligation for capital gains has been or will be funded. If the transfer is being done under the will of the last parent to die, the income tax obligation could be funded with life insurance if there are no other assets significant enough to cover same. If there is a likelihood that the children will not be able to get along, parents have to consider not bequeathing the cottage to the children. Rather, it could be sold to a third party by the estate, perhaps with an option to one or more of the children to purchase the cottage at fair market value. This way, the onus would be on the interested child or children to work out an agreement and that would stand a better chance of survival than the parents imposing a plan from their grave.
Michael Cobb is a lawyer at the law firm of Cobb & Jones LLP. Should you have any questions for Ask A Lawyer, please direct them to the Simcoe Reformer or ask a lawyer of your choice.

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