How to earn cottage tax rebates
Donating your cottage property to a trust or conservancy preserves its natural state, plus may save you money
Describing his cottage on Lake of Bays, Peter Goering lists the mink amongst other vital features, like the dock and the sleeping cabin. His parents bought the property in 1951 and began a journal of everyday observations on weather and wildlife, little things like “saw a family of mink today.” Those simple observations helped stitch the Goering family into the fabric of nature around them and eventually came to play their own small part in protecting that environment.
When his parents died, the cost of taking over the cottage forced Goering to sever and sell three lots from the 50-acre property. That still left him with 34 acres and 1,750' of valuable shoreline, but soaring real estate prices also boosted his municipal tax burden and left a potentially crippling capital gain for his own children. “They’d have to sell off another piece of it to pay the taxes when I die,” he says. “If you project that down the line, it wouldn’t take long to completely urbanize the lake.
“We love the wild environment there: the trees, the plants, and the wildlife. We wanted to preserve it in its natural state.” And so the Goerings began a long campaign to keep the property in the family, and to keep it as they’d come to love it. Finally, in November 1999, they signed a conservation easement barring future development, including logging and the sale of lots.
An easement, also known as a covenant, sets permanent conditions on the use of property.
Hydro easements, for example, give the utility rights to maintain a power line on private property. The easement surrenders rights, not ownership, in exchange for an agreed use. Subsequent owners remain bound by the agreement. Similarly, a conservation easement is an agreement on allowable use, registered on title and binding on future owners. It might be a covenant to maintain a heritage building, for example, or to preserve a woodland in its natural state.
Long-term preservation requires a trusted guardian, some legal body to ensure that the property will be managed according to the initial agreement, even after the original signatories are gone. Donors can assign easements to the care of a land trust, a nature conservancy, a foundation, or a public institution. Even outright donations of title require a suitable recipient to take ownership and use the property for the intended purpose. Many parks and historic sites were once private property, donated to a public body so that they might be preserved for that use.
Without death and taxes, such arrangements would be unnecessary.
Cottagers who prefer peace and quiet to over-development would keep precious waterfront in its natural state because that’s the way they like it. Mortals, however, have no guarantee that their descendants will carry the same torch, and taxes may make it unaffordable.
Even in the short term, property taxes can punish cottagers who would prefer to keep development at bay. Fortunately, even in the short term, some cottagers may have land use options that can keep the tax assessor at bay. Farmland and managed forests, for example, may be entitled to significant tax rebates. However, in the long term, conservation options come back to the donation or sale of easements or title to land trusts or conservancies.
It is an increasingly popular strategy. Stew Hilts, director of the Centre for Land and Water Stewardship at the University of Guelph, says that as the Ontario government began to reduce its support for conservation in the 1980s, he and a few others looked at land trusts as a way to fill the gap. “There were only one or two in operation then,” he recalls. “We set up the Land Trust Support Program with the Federation of Ontario Naturalists, and this became the Ontario Nature Trust Alliance.” An umbrella organization that serves the interests of land trusts, ONTA has grown to 31 members who have helped landowners protect almost 50,000 hectares from development. Of that total, member trusts have bought or been given 11,775 hectares outright.
Donating land for the purpose of protecting it extends well beyond ONTA. Recent federal income tax amendments extended benefits for ecological gifts to municipalities, registered charities, and Crown agencies. There are 58 Ontario charities qualified to accept ecological gifts and sign the tax receipt. Add national organizations like the Nature Conservancy of Canada, the Trans-Canada Trail Foundation, and Ducks Unlimited Canada and the options now open to conservation-minded cottagers appear staggering.
The Goerings took four years to examine all their options, with support from the Muskoka Heritage Foundation. It was time well spent, and produced some nice surprises along the way, including an unexpected municipal tax break from signing a five-year management plan through the province’s Managed Forest Tax Incentive Program. “One of the first things we did was hire an ecologist/biologist to study the property, to see what we had there: flora, fauna, stream, everything,” says Peter Goering. “It made a wonderful story for us, and became the basis of an application under the Managed Forest Program. That reduced our municipal taxes, which had been going out of sight. Now we pay as if we had a small cottage on a small lot.
“More importantly, the process pushed us into learning more about our property, which made the cottage a richer experience for all of us,” he continues. “We participate in the annual bird counts now. And our grandson went back to my parents’ original observations—including that family of mink—to graph the changes in wildlife over the years.” The Goerings’ five-year forestry agreement didn’t solve their long-term concerns about inheritance and capital gains, but it was a solid first step and does represent a range of conservation options short of permanent easement or outright donation. Provincially Significant Wetlands and Areas of Natural and Scientific Interest also qualify for property tax exemptions under Ontario law. And where regulatory controls limit development, in a flood plain or designated green space, for example, there may also be a case to limit assessment and property taxes. Municipalities are understandably reluctant to give up future development and tax revenue without good reason, though, so don’t expect protection under municipal zoning without thorough research. Even then, governments and Official Plans can change.
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