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Who gets the family vacation property...and how?

Holding onto the memories while letting go of ownership

Some of the hardest estate planning decisions are not about dollar values, but about personal values. A prime example is the family vacation property, where the memories are many, and the mere mention of letting go can be painful.  

Unfortunately, it is not an easy decision for parents who intend to keep the property in family hands rather than sell it to strangers. Among those you love, it can be even more emotionally troubling to decide when, how and to whom ownership will pass.

To prepare for these tough choices, it is helpful to have a clear understanding of the tax and legal rules so that you can anticipate the hurdles when you consider your options.

Tax liability for parents as seller/transferor

Apart from transfers between spouses, a change in property ownership has an impact on the seller/transferor’s
income for tax purposes. The transfer triggers a capital gain, which is calculated as the increase in value from the adjusted cost base (generally the acquisition price of the property plus any capital improvements) to the fair
market value. The fair market value is the amount you would get for the property if you put it up for sale. Half of this increased value, the realized capital gain, is added to the seller/transferor’s income for that year.

The tax bill could be reduced by claiming the Principal Residence Exemption (PRE), though that would limit the
use of the PRE on the future sale of any other residential properties owned by the seller/transferor.

Options for passing ownership to one or more adult children

In an arm’s-length sale, a seller transfers ownership without control or concern as to how the purchaser holds title. In family situations, there are more options that parents may consider:

Direct transfer to one child
Even if little or nothing is paid in return, the transfer is deemed to occur at fair market value for the purposes of
calculating the capital gain. Thereafter, the child has all rights of ownership.

Adding joint owners
In this case, a proportionate value is transferred to each added owner. For example, a widowed mother who adds two sons is deemed to dispose of 2/3 of the value. The later death of any joint owner is a disposition of that person’s share, with the survivors continuing to own the property together.

Using tenancy-in-common
A parent could transfer a specific percentage of the value to one or more children, to be held as a tenant-incommon. Like joint tenancy, there is an initial transfer of value to the children and another transfer on any owner’s death, but that deceased owner’s rights pass to his/her estate, not to the surviving owners.

Tax-deferred trust transfer
Parents over the age of 65 years could transfer the property into an alter ego or joint partner trust for their current benefit, with the children as contingent beneficiaries. The property is not deemed to be transferred to the children until both spouses die, at which time capital gains would be calculated and tax due.

Transfer to a lifetime trust
The parents may be content to trigger a taxable disposition to a trust now. They could maintain legal control as
trustees, with future gains accruing to the children as beneficiaries.

Estate distribution possibilities
If the property is held until the second spouse’s death, the capital gain arises at that time. The property could then be transferred to the children (tenants-in-common or joint owners, as desired) or continue to be held in trust, according to the terms outlined in the last deceased’s will.

Funding the tax liability

While the PRE may be claimed in some situations, tax on the capital gain is usually inevitable. And if it is a large tax bill, the decision may be to delay triggering it until death. Parents could buy joint last-to-die life insurance to pay the tax or accept that other estate assets will have to be sold to raise the needed cash.

Seeking professional guidance

This article is intended to provide a broad overview of how property ownership can be passed within a family. For further information, you should speak to your legal and tax professionals to obtain the advice that is appropriate for your circumstances.

Mutual funds and other securities are offered through Aviso Wealth, a division of Aviso Financial Inc.

Aviso Wealth Inc. ('Aviso') is a wholly owned subsidiary of Aviso Wealth LP, which in turn is owned 50% by Desjardins Financial Holding Inc. and 50% by a limited partnership owned by the five Provincial Credit Union Centrals and The CUMIS Group Limited. The following entities are subsidiaries of Aviso: Aviso Financial Inc. (including divisions Aviso Wealth, Qtrade Direct Investing, Qtrade Guided Portfolios, Aviso Correspondent Partners), Aviso Insurance Inc., Credential Insurance Services Inc. and Northwest & Ethical Investments L.P.

The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This material is for informational and educational purposes, and it is not intended to provide specific advice including, without limitation, investment, financial, tax or similar matters. 

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