Who Gets the Cottage?

The family cottage. It is that most Canadian of legacies where the memories made become part of family lore. That’s is why it’s important that your cottage, and all that it represents, stays within your family for generations to come.

In the eyes of the Canada Customs and Revenue Agency (CCRA), your cottage is considered a capital asset. As such, upon your death they automatically assume that it has been transferred your spouse. If you have no spouse, you are deemed to have disposed of your cottage at fair market value, and of course they will expect you to pay taxes on this «deemed income».

But what happens if your family does not have the money to pay these taxes? After all they haven’t actually sold the cottage. In recent years real estate values have increased substantially. Your family could be forced to sell the cottage at a fire sale price to pay the tax owing.

So what is the solution? Simple. Use a Universal Life policy to pay the taxes. Premiums paid over your lifetime end up being a fraction of the potential tax bill, and they are paid gradually rather than all at once. Take the example of Sam and Donna, and their son John. Sam and Donna purchased a cottage in 1980 for $30,000 and it is now worth $150,000

Sam and Donna have arranged in their wills that their assets, which include the family cottage, be passed down to John. Should the cottage appreciate in value at 5% per year, the capital gains tax at Donna’s age 84 (her life expectancy) would be $104,000. This amount must be paid before John receives his inheritance.

Sam and Donna wish to conserve their assets for John and find a way to minimize the impact of the capital gains tax, so they establish a Universal Life policy. The policy is set up for a death benefit of $104,000 to cover the estimated capital gains tax. With premiums of $3,203 annually over 10 years, Sam and Donna will end up paying $32,300 to offset the $104,000 in taxes owing by John upon their deaths.

Using Universal Life, they are able to save over $70,000 in taxes, while at the same time keeping their cottage within the family.

Yours truly,

Michael Arbetov, CFP, FMA
Financial Management Advisor
(604) 875-8878
[email protected]


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