How to earn cottage tax rebates
Donating your cottage property to a trust or conservancy preserves its natural state, plus may save you money
Which brings us back to trusts, set up to hold title or monitor easements into the future for permanent protection. Donating ecologically sensitive land to a qualified trust creates an income tax credit based on its market value: 17 per cent of the first $200 and 29 per cent of the remainder. The credit will be partially offset by capital gains tax on deemed disposition, but only 25 per cent of the capital gain on an ecological gift is taxed, as opposed to the 50 per cent you would pay if you sold the land. If, for example, you bought property for $50,000 that is now worth $200,000, the capital gain would be $150,000. If you sold it to a developer or gave it to the kids, you or your heirs would have to pay the tax on half ($75,000) of that gain, with no offsetting credit. The bottom line depends on your tax bracket and other deductions, but let’s say the tax comes to $30,000. By contrast, if the land was an ecological gift, the tax would be calculated on just 25 per cent of the gain, or $37,500, and that tax might be reduced to $15,000. The tax credit, however, is 17 per cent of $200 plus 29 per cent of $199,800, or $57,976. That wipes out the capital gains tax of $15,000 and leaves almost $43,000 in credits to reduce or eliminate tax on other income for up to six years.
Or, like the Goerings, you can donate a conservation easement, retaining ownership but reducing the market value of the land by restricting future development. A conservation easement on your deed barring any road extensions, for example, might deter developers hoping to sever and sell additional lots. Making your land less marketable could warrant a charitable receipt for the difference between market value before and after the easement.
Covering the capital gains on cottage land may be prudent estate planning, but the hard reality doesn’t hit until you sell or die.
Municipal tax bills arrive sooner. In Ontario, property tax is based on current value assessment. In most areas, waterfront development and escalating prices have pushed cottage tax bills up a very steep curve. Complaining about the lack of services or the double hit on school tax won’t win a sympathy discount. What matters is the market value of the property. And the only sure way to reduce municipal taxes is to reduce the value of the property. If you register an easement, you reduce the assessed value and therefore reduce the property tax. If you donate the land, the recipient takes over any municipal tax obligation with the title (except for the Ontario Heritage Foundation, which is exempt from municipal taxes). That obligation is a major reason why trusts and conservancies take time to consider offers carefully and ultimately refuse some gifts. Indeed, some trusts ask donors for a cash endowment, in addition to the land, to cover taxes and the ongoing costs of maintaining the property.
The question of just how a property will be managed and protected into the future accounts for the diversity of land trust arrangements. Far from being an unnecessary complication, the range of options allows cottagers to find solutions that fit their own unique circumstances.
Easements can be crafted to maintain full enjoyment of the cottage. You might not profit from future development, but if you like the cottage the way it is, barring development is a plus. And although an outright donation means giving up ownership, it doesn’t have to mean giving up the cottage. Some donors have severed the cottage from adjacent land, then donated the land but not the cottage. With restrictions on title, the donated land can continue to be maintained as forest or whatever it was before. Other families have donated cottage and land, but reserved the right to occupy the cottage for the lifetime of the owner or family members. Still others have donated cottage and land, with an agreement allowing them to lease it back from the trust or conservancy.
Stew Hilts advises prospective donors to start by calling two or three trusts to get general information, and then hiring a lawyer and possibly a tax accountant. Then consider the questions of long-term management and which type of trust might be best equipped to carry out your wishes. The question of long-term viability is addressed in part by ONTA, which requires its members to adhere to common standards on legal liability, conflict of interest, insurance, and management plans, for instance. If there’s a local land trust, ask officials about their criteria for acceptance and their land management arrangements. Some trusts hold title but contract other agencies for local maintenance. Conservation Authorities, or their associated foundations, are experienced land managers and a well-established trust option in most Ontario cottage areas, but as public bodies, they would likely require public access to the land. The Nature Conservancy of Canada, the largest trust in Ontario, is often more open in its acceptance criteria than local trusts, but it does ask for ecological significance. American owners of cottages in Canada have been successful in donating land to U.S. conservancies, which then transfer title to Canadian trusts. The international “flip” gives American donors full advantage of U.S. tax rules.
“The choice,” says Hilts, “comes down to your own philosophy towards the management of the land. For example, the Conservation Authority might be more public and the local land trust might have a greater sense of ‘leave it alone,’ perhaps because it can’t afford to do more than that. The important thing is to be patient. Setting up land protection is a more complex and slower process than it seems and can take two to three years. And easements are especially time-consuming. But if you think about it, you really want an organization that will be careful enough to take the time. It’s the long-term protection that matters.”
On her own time, Kim Gavine is a director of the Couchiching Conservancy, a local land trust. In her day job, she coordinates land donations at the Ontario Heritage Foundation, a not-for-profit agency of the provincial government and the second-largest land trust in the province. She echoes Stew Hilts’ warning that it takes lots of time to settle the questions of future management to everyone’s satisfaction. Otherwise, there can be regrets on both sides. “There have been cases where people donate land with an old rundown cottage on the site. Rather than carry the cost of maintaining it, the trust removes the building. Then the donors come back and are upset that it’s gone, or hasn’t been fixed up. And trusts have regrets when they’ve accepted donations, without criteria, and then been stuck with high maintenance costs. You can’t place conditions on a gift, but you can choose a recipient who shares your intentions. Finally,” Gavine adds, “nobody should ever will land to a trust without speaking to the trust first. It might not meet their criteria for acceptance.”
“We prefer larger holdings to piecemeal acquisition for cost reasons, simply because it’s going to cost us more to buy a small parcel of land and run it.”
One common criterion is size. “We prefer larger holdings to piecemeal acquisition for cost reasons,” says Gavine. “Simply because it’s going to cost us more to buy a small parcel of land and run it. Twenty-five acres is small, but we might accept a donation of that size.” Even donated property costs thousands of dollars for surveys, fieldwork to determine ecological significance, and legal fees. A large cottage on a small lot might need an almost extinct species under the deck to justify the costs of acquiring and maintaining the property.
The slow pace of negotiating trust arrangements leaves time to ensure that everyone affected realizes the implications. “We set out to secure the land for our children,” Peter Goering says. “They understand that.” Goering’s neighbours, a young couple who cottage on one of the lots Goering had to sell when his parents died, were also supportive. “When I first talked to them about it they thought it was wonderful—‘You mean nobody’s going to be building there…forever?’ But, of course, it’s more complicated than that. The easement reduces our taxes, but to the extent that it makes their land more valuable, their taxes could go up.”
The Goerings consider their own tax advantage a gift. “It helps,” says Peter. “We’re retired, and we can carry it over into future years. But it’s not why we did it. We started with two purposes: to keep the land in a natural state, and to pass it along without making it a burden, so our children or grandchildren won’t have to sell it. Those two goals fit together beautifully, and we’re happy that we’ve accomplished both.”
This article was originally published on February 16, 2007