Vacation Property Strategies
Transfers to Children
Most of the options considered by cottage owners involve some sort of transfer to family members, usually adult children. Some strategies also involve a transfer of property from one spouse to another. The following is a summary of some of the more common alternatives which property owners have been looking at:
- Gift to children
- One of the simplest means of realizing capital gains is by giving property to children. Since this is something which would normally be done upon death in any event, it accomplishes this goal while at the same time providing income tax advantages. The obvious disadvantages of this alternative, however, is that all control is lost over the property. Once a gift is made to the children, it is theirs to deal with as they see fit. For example, the children could sell or lease the property without the parent's permission and could even deny the parents access to the property.
- Gift to trust for child
- A variation of this which allows the parents to retain a greater degree of control is a transfer of the cottage to a trust. If for example, the parents appointed themselves as trustee of the property, they could determine how the property was used during their lifetime. Additional flexibility could be involved in a trust in that the parents, as trustees, could decide which one or more of their children ultimately became the owner of the property. A simple gift to two or three children, for example, would require the children to agree on the use of the property and the sharing of related expenses and maintenance responsibilities (who's going to stain the deck this year?). Under a trust arrangement, however, the parents could give themselves the flexibility to determine, at some future point, that only one of their children would become the owner. Furthermore, where the children are young, a trust may be a necessity since no one (it is hoped) would simply give away a valuable asset to a minor.
While a trust has certain advantages, it is undoubtedly somewhat more cumbersome and complex (and therefore expensive) to establish and maintain. It is for this reason that this alternative, while perfectly viable in the right circumstances, is frequently not chosen.
- Sale to children, subject to mortgage
- If a trust is not your style, you might consider a sale of the property to your children for some agreed upon price which approximates fair market value. Rather than taking cash in exchange (which the children probably would not have anyway), the parents could take back a non-interest bearing demand promissory note secured by a mortgage on the property. Thus while the debt would not cause any immediate financial burden to the children, it would be a rather effective leer in the hands of the parents who, for example, showed up at the cottage one day to find that the locks had been changed and the property rented to a religious cult. In such circumstances it would be open to the parents simply to call the note and, upon default, to re-acquire the property. The risk here, of course, is that the children would be able to summon sufficient financial resources to actually pay off the note. Another disadvantage of the sale option is that land transfer tax would be payable. (Land transfer tax is payable only to the extent that a purchaser actually pays something for the property, including the assumptions of a mortgage.)
Transfers to a Spouse
Although somewhat more unusual than a transfer to children, occasionally individuals will consider transferring ownership of a cottage property to a spouse. Under the general rules of the Income Tax Act, a property transferred from one spouse to the other occurs on a tax deferred basis. However, there's an election available under the Act which permits a transfer to take place at fair market value. On a transfer to a spouse where this election is made, a capital gain can be triggered which is eligible for the gains exemption.
Assuming that relations between the spouses are good, a simple transfer ownership between them would allow the proper control of the property to be retained. However, there are a couple of other points which should be considered. For example, if a cottage property is jointly owned, and if one spouse transfers his or her interest to the other, the cottage will form part of the cottage owner's estate for probate purposes. On the other hand, if the property remained jointly owned, the property would not need to go through probate upon the first death.