By: Jayson Schwarz LLM and Allan Church
In this article we’ll talk about some different options as to how to own or hold title to the family cottage.
Background
For income tax purposes, spouses can transfer property, during their lifetime or upon death, to the other spouse without realizing any gain. In this article we will address the tax consequences of transfers to other family members but keep in mind that property, or an interest in a property, can be transferred to a spouse without creating any current tax. In some circumstances there can be future tax implications (attribution of future gains). A lawyer or accountant knowledgeable in these tax matters should be consulted before changing title to any property.
Simple Title
Simple title means that one family member holds title to the cottage property. When the cottage is sold or transferred to family members, any gain will be taxable to the owner of the property. This form of ownership is straightforward but offers very little flexibility.
Tenants in Common
Tenants in common each own a divided interest in the property. Each owner can sell his or her interest without creating any tax consequences for the other owner.
Where a husband and wife own the cottage as tenants in common, should one of them die, they can leave their interest in the cottage to one or more of the children and only the gain attributable to that interest would be subject to tax. For example, if a husband and wife each own 50% of the cottage and the husband dies, he can leave his 50% interest in the cottage to the kids and only half of the gain would be realized for income tax purposes.
Joint with Right of Survivorship (JWROS)
Where title is held JWROS, both parties have an interest in the entire property. Should one of the parties die, the other party automatically owns 100% of the property. Where the parties are spouses, the gain on the deceased’s interest in the property is deferred until the survivor sells the property or dies. JWROS title limits the ability of the parties to transfer their interest in the property to anyone other the co-owner but avoids the application of probate fees on the value of their interest in the property.
Ownership Via a Trust
A trust can be used to own a family trust. A trust is an arrangement in which a person or group of persons, the trustees, manage an asset or assets for the benefit of another group of persons known as the beneficiaries.
One would not normally transfer a cottage to a trust because the transfer would trigger tax on the accrued gain. Consider however a situation where mom and dad were considering buying a cottage that they wanted to use during their lifetime but they also wanted their kids to have the use of the cottage after wards. A family trust could be established to own the cottage. Mom and dad could be the trustees of the trust and could control the cottage during their lifetime. Sometime in the future, the trust could transfer the cottage to the kids without triggering tax on the accrued gain.
A trust is a very flexible and powerful planning tool. Setting up the trust properly involves some complexity and must be done correctly to avoid tax and other pitfalls. A lawyer who is knowledgeable in this area is a must if you are considering using a trust to own the family cottage.
My thanks to Allan Church, senior tax partner at MNP LLP in helping write this article.