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Family Cottages (The Downside)

Family cottages are a great tradition in Canada but they can be the source of a lot of conflict, particularly when mom and dad are getting up in years and want to transfer it to the next generation. Hopefully, this is done while they have their faculties. There are significant tax issues which should be reviewed with their accounting and legal advisors. One thing to keep in mind is that under the Income Tax Act, owners can only designate one principal residence. Gone are the days when mom could designate the home as hers and dad could designate the cottage as his (this was changed a number of years ago). Thus, capital gains tax will be applicable in this situation to one of the properties upon transfer or death. Some cottage owners have tried to delay the payment of capital gains by setting up a cottage trust. These can be a mine field for the family if they are not set up and properly administered. There are a number of other options which should be considered, including a transfer during the life time of mom and dad at fair market value to one or more of the children. If more than one child is to get the cottage, there have to be some rules laid out as to sharing of expenses and what happens in the event of disagreement or one child wants to sell. It is best to put this in a binding written agreement and have everyone sign. These are not easy issues to resolve but it is important for the discussion to start at the earliest possible time and that the proper advice be obtained. In my next article, I intend to illustrate some problems families have had in dealing with the ownership of family cottages. 

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