What Happens if Your Legacy Isn’t What Your Beneficiaries Want?

What Happens if Your Legacy Isn’t What Your Beneficiaries Want?

Let’s face it, there are many differences between generations. This can become very apparent, especially when the generations come together as a family.

For many Canadians, the cabin is where this coming together takes place and many wonderful, multi-generational memories are housed. Amazing things happen at cabins, from bonding and making memories to coming together to partaking in regular maintenance and collaborating on projects that require sweat equity, like rebuilding the dock.

Anyone with a cabin knows there are many considerations – financial and emotional – that go into preparing to transfer the family cabin to the next generation. Sometimes people get so focused on how to transfer the cabin – capital gains tax, equity between children and so on – they forget to ask the next generation if the cabin is something they want to inherit.

The fact is, sometimes the next generation may not have a strong connection to the cabin or the means to pay for (their share of) the costs associated with maintaining the cabin. Perhaps the next generation would rather have the proceeds from the sale of the cabin instead of the property and the ongoing costs associated with it.

Passing the cabin to the next generation can get complicated. Having open, frank discussions with all the generations and parties can identify the options and determine what everyone’s wishes are. You may find it helpful to have your financial advisor at this discussion to talk through options and impacts of various scenarios. Not to mention a third party can help keep people focused on the discussion at hand.

Once the intentions for the family cabin are identified, a plan can be developed to execute and achieve the goal. It is important to document your family’s philosophy for the cabin in your estate plan and will. A regular review every few years will help ensure if your family’s circumstances have changed, your current situation and wishes are reflected.

If you would like help discussing the options for transitioning your cabin or would like a knowledgeable financial professional to work with your family, connect with us.

What’s the Deal with Capital Gains and Cabins?

What’s the Deal with Capital Gains and Cabins?

In the simplest terms, capital gains are ‘gains’ usually monetary, obtained from the sale of capital property. Capital property can be real estate or securities like shares and stocks. The gains are the positive difference between what you paid for the item and what you sold it for, minus any legitimate expenses connected to it and the sale of it.

In Canada capital gains are taxed based on your marginal tax rate, which varies by province. However, only 50% of the gains are taxable. For example, on a capital gain of $100,000, only $50,000 would be taxable. So, for a Canadian in a 33% tax bracket, a $50,000 taxable capital gain would result in $16,500 taxes owing. The remaining $83,500 is the sellor/investors’ take. (The Canadian Revenue Agency offers step-by-step instructions on how to calculate capital gains.)

When it comes to vacation properties like cabins, capital gains are the difference between the purchase price and the selling price, minus the cost of any enhancements (not including ongoing upkeep) made to the property.

For the sake of this discussion, let us consider:

  • A family cabin purchased for $100,000 and worth $500,000 today
  • The cabin is owned by a mature couple (parents) with two adult children

For this example, assume the parents’ will is set up to transfer their share of the cabin between the couple after the first of the pair dies and then to their adult children after the last parent dies.

In this case, the capital gains wouldn’t be triggered until the last parent dies and the cabin transfers to the adult children. The capital gains tax would be due immediately as the asset, cabin, is deemed to have been sold to the second generation once the remaining parent dies. So, capital gains would be calculated based on today’s $500,000 fair market price minus the original $100,000 purchase price, with 50% of the $400,000 capital gain taxable.

During the time the cabin was owned by the parents if any capital expenditures were done, outside regular maintenance, like an addition for example, the costs associated with that addition can be subtracted from the overall capital gains.

For the purpose of this example, an addition was done and cost $50,000, leaving $350,000 as the capital gains and $175,000 as the taxable portion of the capital gain. The capital gains tax will be payable by the estate at the marginal tax rate of the estate. If the estate is rich in property and low in investments or cash, a sale of one of the properties may be needed to pay the taxes.

There are many variables involved in transferring a cabin between generations. Some of these variables include: primary residence status, multi generational transfer with multiple kids, joint owners, blended families, and more. It is easy to see how important planning for the cabin’s transition is and how complex it can become – it is worth the time invested to ensure the family cabin is passed onto the next generation in the most tax efficient manner.

There is no way to avoid paying capital gains tax. However, there are ways to plan when to incur tax and be prepared to cover the cost. Connect with us to learn more about what you can do to prepare for your cabin’s future.

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