‘Torch has been passed’: What younger generations need to know about inheriting a family cottage
With a excessive variety of Canadians anticipated to retire over the subsequent few years, the pattern of youthful generations inheriting their household cottages will contribute to “major shifts” within the possession of leisure houses, in response to new analysis from Re/Max.
But amid rising considerations round the price of housing, some could also be questioning whether or not they can afford to maintain their leisure residence within the household.
In its 2023 Cottage Trends Report launched April 27, Re/Max says Generation X is already driving the leisure housing market, partly as a result of excessive quantity of intergenerational wealth transfers. Additionally, information launched by TD Bank Group earlier this yr exhibits practically 900,000 child boomers are set to retire inside the subsequent three years.
According to Christopher Alexander, president of Re/Max Canada, many extra households are more likely to move their cottages all the way down to family members within the years to come back.
“The torch has kind of been passed from baby boomers to gen-Xers, who are driving market activity right now,” Alexander advised CTVNews.ca in a phone interview on Wednesday. “[Gen Xers] are also buying cottages with the intention to pass it on to their children [and] have it as a family heirloom.”
A Leger survey commissioned on behalf of Re/Max as a part of its developments report exhibits 56 per cent of Canadians both plan to or have already put their leisure property of their beneficiary’s title. Additionally, 74 per cent of those that personal leisure properties say they really feel assured they are going to be capable of move down their property to family with the correct planning.
While many Canadians seem assured of their capability to do that, a key issue to think about is whether or not their youngsters can afford to maintain the house, mentioned Jamie Golombek, managing director of tax and property planning with CIBC in Toronto.
Amid a cost-of-living disaster, residence affordability stays a priority for a lot of. Canada has the best degree of family debt within the G7, a quantity that has been rising “inexorably” due to rising residence costs, in response to the Canada Mortgage and Housing Corporation.
It’s not unusual for households to promote a cottage to absolve themselves of possession, Alexander mentioned. More usually than not, this isn’t as a result of family have misplaced curiosity in proudly owning the house, however due to the hurdles they confront whereas attempting to maintain it, mentioned Peter Lillico, a lawyer with Lillico Bazuk Galloway Halka primarily based in Peterborough, Ont.
“Parents make assumptions like, ‘the kids love the cottage and they get along, therefore there’s a cottage succession plan,’ and it’s just not,” he advised CTVNews.ca in a phone interview Thursday. “One of the main reasons that those cottages go up for sale after decades is you’ve got three kids and one of them says, ‘I can’t afford it.’”
Looking particularly on the leisure housing market, common costs stay above pre-pandemic ranges as we speak, Alexander mentioned. Combined with elevated rates of interest, “the ability to carry two properties has been more challenging in the last year,” he mentioned.
ARE THERE TAXES INVOLVED IN INHERITING A COTTAGE?
In addition to maintaining with property taxes and mortgage prices, households might want to think about a capital features tax when transferring possession of their cottage, mentioned Lillico.
Whether dad and mom are promoting their leisure residence to their youngsters or giving it as a present, the switch continues to be thought-about a “disposition” by the Canada Revenue Agency, or a sale at truthful market worth, Lillico mentioned. This will set off a capital features tax, which is a federal levy that accounts for the rise in a house’s worth because it was final bought.
In Canada, 50 per cent of the capital acquire from a sale have to be added to the vendor’s whole taxable revenue. The quantity they are going to pay relies on their tax bracket. If the owners die earlier than transferring possession, this tax might be paid utilizing cash from their property, Lillico mentioned.
A principal residence tax exemption can permit owners to keep away from paying a capital features tax on income made out of promoting a property if it’s their fundamental residence. But any revenue generated up till the house is designated a principal residence continues to be taxable, mentioned Lillico, who has greater than 44 years of expertise in cottage succession planning.
“The cottage may qualify as their principal residence from that point forward, but it doesn’t wipe out capital gains [from previous years],” he advised CTVNews.ca. “Sometimes that will catch people by surprise.”
One method to quickly keep away from paying capital features taxes is to position the house in a “sprinkling” cottage belief, Lillico mentioned, a sort of asset safety belief. This will permit the subsequent era to switch the leisure property to their youngsters with out paying a capital features tax for as much as 21 years. Placing the property in this type of belief may even defend the house owners from third-party claims if somebody have been to get divorced or go bankrupt.
Being conscious of insurance coverage charges and different prices concerned in sustaining the house will assist households make an knowledgeable determination on whether or not the subsequent era can afford to maintain the property, or if they need to promote it, Alexander mentioned.
Golombek additionally recommends talking with monetary advisers to find out the tax penalties of inheriting a household cottage, in addition to whether or not an individual’s revenue and bills will permit them to afford to maintain it.
FAMILY DYNAMICS ANOTHER IMPORTANT CONSIDERATION: EXPERTS
In addition to funds, it’s necessary that folks converse with their youngsters about whether or not they need to inherit the leisure residence within the first place, mentioned Golombek.
“Especially if there’s multiple kids … it’s very important to have that discussion,” he advised CTVNews.ca in a phone interview Thursday. “If they don’t all want it, then you can create a lot of issues there by leaving it to them equally.”
Lillico recommends making a legally enforceable cottage sharing settlement for individuals who will inherit the property earlier than it’s handed down. In writing, members of the family ought to lay out phrases round entry to the property, the sharing of bills and any restrictions on transferring the house to these exterior the household. He additionally suggests setting cash apart, if potential, to cowl restore prices down the highway.
THE STATE OF CANADA’S RECREATIONAL REAL ESTATE MARKET
Most of Canada has seen an increase within the provide of leisure houses, other than some outliers in Ontario and British Columbia, the place costs are “exorbitant,” Alexander mentioned.
Areas corresponding to Muskoka and Prince Edward County in Ontario have seen property values undergo the roof over the previous few years, main many leisure owners in these areas to see excessive capital features over time, he mentioned. As these markets stay sizzling, peripheral areas corresponding to these additional north within the province have turn out to be extra enticing as cheaper alternate options.
“Within three hours of a major city, as long as the demand is there … you’re going to see property values increase and then you’ll have higher capital gains,” Alexander mentioned.
CTVNews.ca has put collectively an inventory of leisure properties presently in the marketplace throughout Canada.
BRITISH COLUMBIA
(Hayden Simon, Century 21 Creekside Realty)
Location: Harrison Hot Springs, B.C.
Price: $599,000
Year Built: 2002
Property Size: 189.52 sq. m
Lot Size: 0.33 hectares
Situated on the shores of Harrison Lake, this leasehold property is a two-hour drive from Vancouver. With practically 190 sq. metres of residing area, it contains 5 bedrooms and two bogs. The residence additionally contains a wooden range within the residing space and a wood-burning sizzling tub within the yard.
ALBERTA
(Ryan Sagert, 1.m.A Media / Cathren Dorchester, Royal LePage Parkland Agencies)
Location: Rural Wetaskiwin County, Alta.
Price: $759,000
Year Built: 1980
Property Size: 78.42 sq. m
Lot Size: 0.08 hectares
This lakefront residence has 4 bedrooms and two bogs, along with a kitchen, lounge and absolutely completed basement. The decrease degree comes with heated flooring and gives out of doors entry. In the yard is a fireplace pit, together with a stone walkway that results in Pigeon Lake.
ONTARIO
(Big Bay Media / Erin Monett, Chestnut Park Real Estate)
Location: Muskoka, Ont.
Price: $1,199,999
Year Built: 1976
Property Size: 165.55 sq. m
Lot Size: 1.31 hectares
Two separate docks cleared the path to this four-bedroom, two-bathroom residence in Muskoka, Ont. The property contains practically 314 metres of shoreline alongside Green Bay, and 1.31 hectares of land. Large home windows within the eating space present a transparent view of the waterfront. In addition to the cottage, a seasonal log cabin can also be located on the property.
(Carol Love, Century 21 Lanthorn Real Estate)
Location: Prince Edward County, Ont.
Price: $949,000
Year Built: 1981
Property Size: 130.06 sq. m
Lot Size: 1.09 hectares
Located in Prince Edward County, Ont., this waterfront bungalow gives views of Consecon Lake. Inside the house are 4 bedrooms, two bogs, a lounge, kitchen and recreation room. In the yard is a screened porch and deck going through the water, which might be accessed by way of a non-public boardwalk. This leisure house is situated close to Millennium Trail in addition to outlets, wineries and extra.
NOVA SCOTIA
(Christopher Green / Joel Flewelling, Royal LePage Atlantic)
Location: Annapolis County, N.S.
Price: $399,000
Year Built: 1882
Property Size: 118.73 sq. m
Lot Size: 0.25 hectares
This two-storey residence has two bedrooms, two bogs and practically 120 sq. metres of residing area. On the principle flooring is a mixed residing and eating space with a wood-burning range, in addition to a sunroom. On the higher flooring, each bedrooms share a full toilet, which features a bathe.
PRINCE EDWARD ISLAND
(Odyssey Virtual / Jodi Bernard, Century 21 Northumberland Realty)
Location: Queens County, P.E.I.
Price: $499,000
Year Built: 2019
Property Size: 142.7 sq. m
Lot Size: 0.4 to 1.2 hectares
Situated on prime of a hill, this cottage in central P.E.I. gives panoramic views stretching from Sea View to Park Corner. It options two bedrooms and two bogs, together with a kitchen and mixed residing and eating space. At the again of the house is a coated deck that’s partially screened-in.
NEWFOUNDLAND AND LABRADOR
(Krista Trask, Century 21 Seller’s Choice)
Location: Whitbourne, N.L.
Price: $449,900
Year Built: 2020
Property Size: 228.91 sq. m
Lot Size: beneath 0.4 hectares
Modern finishes might be discovered all through this residence in Whitbourne, N.L. The open-concept format of the principle flooring contains vaulted ceilings and chalet home windows. Also on the principle degree is a connoisseur kitchen with an island that may seat three individuals. The fundamental bed room has a non-public patio door with entry to the entrance deck, in addition to three-piece ensuite.
