MUSKOKAN- Death and taxes may be a certainty, but the savvy cottager has a sound strategy for both.
When a cottage owner dies without a well-defined succession plan, it can often result in conflict for the new generation of owners. The Muskoka cottage, which was once such a symbol of family togetherness, can, upon death, become the cause of extensive turmoil among siblings.
Peter Weissman, a specialist in both cross-border taxation and estate planning at Cadesky and Associates LLP, said his services are regularly called upon to help with domestic planning.
“I’ve seen a lot of unfortunate conflicts because people haven’t planned for how the cottage is going to go to the next generation,” said Weissman.
“People should really deal with it when everyone’s healthy and in the right frame of mind. You might find that one of your children is not interested. Just put a plan in place for what to do with the cottage.”
By determining what each sibling wants, and is willing to contribute beforehand, the cottage can continue to be a positive asset in a family. To help mitigate potential problems, a family contract that defines who will use the cottage and when, is an option.
Even with a evenly divided cottage, disputes between family members can be inevitable. For example, arguments can arise over who is responsible for the costs of repairs or a new dock. The debate can get particularly bitter if disparate financial situations exist between siblings.
In the event that an equitable agreement can’t be worked out, more extreme measures are available to parents writing a will.
“One option is to have the estate sell the cottage, and then the children get their share of that. If they then want to buy their own cottage, they can,” Weissman said.
How the ownership of a cottage is organized can also have significant implications on the total taxes one pays. The whole issue becomes even more complex if the cottage owner is a citizen of the U.S.
To put it simply, Canada and the U.S. have different tax systems and an American with property in Muskoka can, if they’re not careful, owe money through both systems.
In the U.S., a person with more than $5 million in taxable assets can owe between 35 and 50 per cent tax on the value of that estate as a result of what’s called the Estate Tax. In Canada, the system is quite different.
When an American with a cottage in Muskoka dies, the government treats it as if they sold what they owned in Canada just before they died. The estate would then owe about 23 per cent in taxes on the capital gains the property experienced over the course of ownership.
That means if a property was bought at $1 million and when the American owner died it had increased in value to be worth $4 million, the owner would owe in taxes on that property about 23 per cent of $3 million.
You don’t have to be a taxation expert to see that there is the potential to be hit with a hefty tax bill.
Weissman said he has seen some serious horror stories. One client had a roughly $15-million-dollar property that, upon their death, had passed on to the spouse. By passing the property onto the spouse, the estate was not subject to the American Estate Tax, but, under Canadian law, they owed millions in capital gains.
“Canada’s system was going to result in a $4-million tax bill, and that’s obviously a large chunk of change for anyone to come up with. Even worse than that, the tax wouldn’t be useable,” said Weissman. “Sometimes, the tax you use here could be used to reduce the tax you pay in the U.S.”
In that particular instance, Weissman and his company were able to help the person, but he said the process was difficult and filled with uncertainty.
Thankfully, through the careful management of assets and awareness of the many pitfalls, it is possible to reduce the sometimes incredibly costly implications of both taxation and death. If done correctly, a cottager can save themselves both a multi-million dollar tax bill and a contentious family feud.