Higher cottage values bring greater responsibilities

Own a cottage? Congratulations.

Over the course of the pandemic, your little home in the wilderness has made you richer on paper—as much as 160% richer if your vacation property happens to be in the Niagara region or just over 130% if you summer in New Brunswick, according to the latest Re/Max Canada cabin and cottage country report.

Today, only about 60% of cottage country markets offer properties listed below $500,000, down from almost 90% in 2019. That’s great news for cottage owners, who can add this asset’s exponentially-increased value to their wealth portfolio.

But to paraphrase a line from the movie Spiderman, with greater cottage values come greater responsibilities. This is especially true for cottage owners who have reached an age where they’re starting to think about passing their nature retreat down to the next generation.

“Given the price increases we’re seeing across the country, it’s important for cottage owners to take the time to review this capital asset that also happens to be an emotional asset,” said Justin Fraser, a Barrie, Ont.-based senior financial planner and cottage country specialist at Meridian Credit Union. “Many Canadians don’t want to think about succession planning in general. It’s even tougher when there’s a family cottage involved and it gets a bit more complicated when values go up as dramatically as we’ve seen over the last year.”

So get comfortable in your canoe, put down your paddle and consider a plan of action for your cottage. 

It all starts with the talk

I know, right? Awkward. But whether you’re aged 55 or a spry 101, you should talk to your family about their cottage country future—when you’ll no longer be around and the cottage is likely to be shared among several family units.

Fraser recommends preliminary private talks first with each family member before holding a group meeting. While these talks can be difficult, they often yield useful and sometimes surprising information.

“A lot of times when families have these conversations, they find out that one or two children are not even interested in keeping the cottage,” said Fraser. “And all this time, the parents are worrying about how to keep the cottage in the family even after they’re gone.”

Decide on a strategy for ownership transfer

Review all the available options for transferring your cottage to family members, with a close eye on how this might affect them and your estate financially. For example, direct transfer of ownership to a child who already owns a house or condo would trigger a capital gain, which would be subject to tax. By comparison, adding the child as a joint owner would trigger capital gains calculation only on a portion of the cottage value.

An alternative to consider is a trust structure, where ownership of the cottage is transferred to a trust that lists your family members as beneficiaries. Beyond greater tax efficiencies, this strategy lets you retain control of the cottage while you’re alive and also protect this asset from claims from former spouses or partners.

“One big drawback is that setting up trusts can get convoluted and you have to file taxes every year for the trust,” cautioned Fraser.

Revisit your insurance

You may have bought an insurance policy years ago to cover the tax liabilities your heirs are likely to face when they inherit the cottage. But as your property’s value grows, so will the numbers on the taxman’s bill.

Fraser suggests sitting down with your insurance or financial advisor to assess your individual and aggregate holdings, and to figure out how much of a life insurance payout you’ll need to provide to your family. They’ll surely thank you when they’re sitting by the lake and feeling blessed to be enjoying such a luxury without the big tax hit.

Set up a maintenance pool

Imagine if, after all the work you’ve put into your cottage—that deck you stained yourself, the new roof you put in last year, your prized river-stone fireplace—its next-generation owners could not afford to maintain it. Heartbreaking to ponder, but it happens.

To prevent your cottage from going into disrepair, consider creating a maintenance pool backed with funds and rules. If you’re planning to transfer cottage ownership into a trust, a maintenance pool can be set up within the trust.

“You then stipulate how and when the funds within this maintenance can be used, such as to cover the cost of replacing broken windows and shingles, or upgrading the furnace,” said Fraser. “This way the kids won’t be forced to sell the cottage because they can’t afford to maintain it.”

If it makes sense, do it now

Should you transfer whole or joint ownership to the kids now? Does it make sense to put the cottage in trust today, when you’re not even retired yet? Besides, it’s summer and you’re supposed to be chilling at the cottage, not thinking about giving it away.

All good points, so by all means stay in the lounger and enjoy your much-deserved weekend. But keep in mind that cottage prices are likely going to keep rising, so you might want to give some thought to what strategies you can use today to trigger—and pay—taxes based on current market values.

“Some people can get too focused on avoiding probate,” said Fraser. “But in some cases the benefits of triggering tax can outweigh the benefit of avoiding probate.”