August is in full swing, and many Canadians are spending time at vacation properties. Memories with loved ones at these cottages, cabins, condos, and chalets are highlights of each year, and keeping them in the family is often of great importance.

SFFG continues to revisit this topic on our website, and at client events, as we know how important these properties are, and want to ensure that they can be enjoyed for years to come.

In order to do this, we enlist the guidance of our in-house experts, who help us emphasize the value in proper planning. We have featured Jamie Golombek, the Managing Director of Tax and Estate Planning at CIBC, at several client events. He warns that if this planning is not done, “in extreme cases, (it) could force the sale of the recreational property that may have been in your family for generations”.

This forced sale happens when funds are not set aside to pay capital gains tax, which is triggered either upon the sale or gift of the property, or upon the death of the owner. It is calculated as the difference in the value, and the adjusted cost base (ACB) of the property. The ACB is the amount you bought it for, plus any improvements that have been made. Keep your receipts!

The main exception to capital gains tax is when the property is transferred to a spouse during an owner’s lifetime or upon their death. Additionally, capital gains tax does not apply to principal residences.

For vacation properties in which a gain will be taxed upon the owner’s death, a life insurance policy is one of the most commonly used planning tools, as the death benefit can fund the tax liability. If life insurance is not feasible given the age or health status of a property owner, a trust is a common alternative. Owning a property in a trust ensures that it is not included in your estate value, which reduces the probate fees that are calculated as a percentage of assets. These savings can then be redirected to lessen the tax bill, as capital gains may still be triggered.

Each situation is unique, and this is why we ensure our business partners are available to you. Equally as important is the dialogue amongst family members, when determining the feasibility of keeping vacation properties in the family. When multiple children are involved, their individual circumstances must be considered – for example, if they can spend the same amount of time at the property, or have the capacity to look after it.

In terms of looking after the property, another consideration is planning for ongoing expenses. Should funds be set aside to contribute to the maintenance and improvements of the property?

These are all conversations that should be had amongst family members, alongside the experts we enlist to make the transition as seamless as possible.

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What’s up dock? Tax & estate planning for your vacation property