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  The Companion Advisor: Taxes & Estates
Estate planning from the Muskoka chair 

Rlaxing by the lakeCanadians love their cottages and chalets. Many have been in the family for several generations. Estate Plans must be set up to keep these much-loved properties in the family for future generations.

In 1992 and in the couple of years following, there was a flurry of activity and media coverage as cottage owners sought to crystallize capital gains on the cottage and use their $100,000 capital gains exemption. Some owners actually transferred cottages to children or into trusts. Others waited and were able to take advantage of the simple filing of an election with their 1994 income tax return. Still others did nothing. The ones who sheltered part of the capital gain on their cottage still may have some estate planning to do. Those who have procrastinated should get off the Muskoka chair and do some estate planning as well.

The first question is when the plan should be effective ... now or at death. For those who did not use their capital gains exemption to shelter the gain in value, any transfer or sale during their lifetime will immediately trigger the capital gain in the value of the cottage. This gain will need to be declared and give rise to tax that is payable in the year in which the transfer or sale takes place. The optimal plan may be to ensure that the cottage owner has a valid Power of Attorney for the Management of Property, perhaps stipulating that the cottage may be maintained during the owner's incapacity for the use of other family members.

As well, the cottage owners should have a valid Will providing a scheme or direction to the executors regarding the holding, transfer or sale of the cottage. Thought should be given to placing life insurance on the owners' lives to generate cash in the estate of the last spouse to die. This tax-free cash could help pay the income tax owing when the cottage passes to the next generation.


If there is not a large capital gain in the cottage value to be triggered by a transfer by the owner, while alive, because the cottage has not appreciated in value since purchased or the gain was sheltered, the owner has additional options. These options are looked at to save or defer income tax and probate fees. Several of the alternatives include:


1) Selling the cottage to your children, with or without a low or no-interest mortgage;

2) Giving the cottage to your children, with or without a long-term lease; Transferring the cottage into co-ownership with your children, with or without survivorship rights;

3) Transferring the cottage, reserving an interest to use and possess the cottage for your lifetime; or transferring the cottage to a trust or corporation.

The owner can sell, give or transfer all or a part ownership interest in the cottage. If the owner has no children or does not wish the children to have the cottage, these same strategies can be applied to other relatives or friends. When making these choices, consider the following factors:


A) How much control the owner is willing to give up/how much involvement the owner wishes to have;

B) Who should or will pay the cost of upkeep and maintenance for the cottage, such as taxes, hydro and insurance;

C) Do the children want the cottage or do they live too far away or have their own cottages already; the cost of making the arrangements to sell, give or transfer the cottage, including legal and accounting fees, income tax payable, land transfer tax, ongoing filing costs; implications of family law legislation for both you and any adult children;

D) The possibility that a child's interest in the cottage will be seized by creditors to pay outstanding debts of your child; and

E) Changes required in your Will and other estate plans to reflect the new arrangements.


The family cottage or chalet is a place for escape from the stresses of everyday life. Use this article to stimulate discussion in your family about a plan to keep the cottage in the family for the next generation. Seek the help of an accountant and a lawyer to find the tax consequences of various strategies and to implement a plan that works for you and your family.

The information in this article is general and should not be relied upon as a substitute for professional advice in specific situations.

©1999 - For more information contact Suzanne Michaud, a lawyer practicing in association with the Mississauga, Ontario law firm of Pallett Valo, Barristers and Solicitors, working with clients in the area of family law.

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The Money Management Newsletter:
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Taxes and Estate Planning