With the Victoria Day long weekend in the books, the summer vacation season is now in full swing. For many Ontarians, this means long weekends and summer nights at the cottage. In the spirit of the season, let’s take a few minutes to review some considerations for estate planning involving a cottage or recreational property in Ontario to minimize the likelihood of litigation post-death and so that memories can continue to be made for generations to come.
1. The Tax Man Cometh
Unless the cottage property qualifies for a principal residence exemption, it is likely that estate planning involving the cottage will trigger tax consequences whether the property is gifted prior to a parent’s passing or whether it continues to be owned by the testator on date of death. If the property is a legacy property that has been in the family for decades, the tax consequences on the capital gains could be substantial.
In formulating an estate plan involving a cottage property, a testator would be well-advised to seek advice on how to minimize the tax burden and also to ensure that there is sufficient liquidity in the estate to pay any tax liability. If the estate has insufficient cash to discharge the tax burden, the cottage itself may need to be sold to do so.
2. Understanding the Beneficiaries
Estate planning is a sensitive topic, especially when recreational properties enter the discussion. A parent conveying ownership of a cottage may not fully appreciate the reality of what is being passed on aside from the property itself – in particular, the burdens of co-ownership.
A parent may also not appreciate that certain factors might operate in favour of, or against, the beneficiaries receiving an equal share. In this increasingly global economy, it is becoming more common for children to move away for school and employment, limiting their ability (and desire) to use the cottage. Alternatively, a beneficiary may simply have no willingness to inherit the costs, both financial and physical, that come with ownership. As a result, the goals of a selection of beneficiaries may not always be aligned, and a testator treating them as if they are may not be ideal.
3. Communication is Key
For these reasons and others, a parent would be well-advised to have a discussion with the prospective beneficiaries to determine their views vis-à-vis cottage ownership. While estate planning is in many cases a private matter even in respect of one’s own children, in certain circumstances having a discussion with one’s prospective beneficiaries to ascertain their interests may avoid years of strife.
Such discussions could ensure, for example, that a beneficiary with no interest in cottage ownership receives adequate compensation for their interest by other means. For those beneficiaries who intend to retain their eventual ownership interests, further advice could be sought with respect to how the obligations that flow from ownership, including scheduling of occupancy, payment of expenses, and maintenance and improvements, ought to be handled.
Ultimately, communication provides some added layer of certainty. The emotional connection to a family property can be a tinderbox for conflict and discord, and thoughtful discussions with loved ones may reduce the likelihood of that conflict erupting into litigation and ensuring the preservation of a legacy.
If you wish to discuss your estate planning options involving a family cottage, or if a dispute has arisen with respect to such a property, the lawyers at Mills & Mills LLP would be pleased to assist.
At Mills & Mills LLP, our lawyers regularly help clients with a wide range of legal matters including business law, real estate law, estate law, employment law, health law, and tax law. For over 130 years, we have earned a reputation amongst our peers and clients for quality of service and breadth of knowledge. Contact us online or at (416) 863-0125. The material provided through the Mills & Mills LLP website is for general information purposes only. It is not intended to provide legal advice or opinions of any kind.