3 succession case studies
How these cottagers passed on their properties
Situation: Large property, large, tightly knit clan
Solution: Non-profit organization
Quite popular in the 1950s and ’60s, the non-profit organization enables successive generations of family members to use the cottage or cottage compound without incurring capital gains tax or provincial estate administration (probate) fees. Of course, capital gains tax will apply up front when the family transfers the property into the non-profit, but after that, the cottage can roll along for decades without triggering more. That’s because once the property is transferred, family members are no longer owners, but dues-paying members of a cottage that operates like a club. The member-elected board of directors can decide who qualifies for membership, be it blood descendants of the matriarch and patriarch or those chosen by other criteria. Membership is not passed from parent to child, so there is no inherited asset that can be taxed. Children become independently eligible for membership at an age set out in the bylaws (perhaps at 21 or 30) and their membership expires at their death. Spouses may qualify too. Only if the board of directors, who can be family members, decided to sell the property and wind up the organization, would tax on capital gains apply once again.
If you’re wondering why a cottage property would qualify for non-profit status, remember that non-profits are not charities. In fact, a charitable organization is not eligible. The main criterion is that it should not make a profit. As a Canada Customs and Revenue Agency bulletin published last August sets out, non-profits must be organized “exclusively for social welfare, civic improvement, pleasure, recreation or any other purpose except profit,” and not distribute any income to individual members.
Although it can be scary to think about surrendering control of this beloved heirloom, a non-profit can be an ideal solution for people whose property is large and has extraordinary physical features: perhaps a 1920s Lake of the Woods fishing camp; a cottage compound on a long private sand beach; a piece of pristine waterfront with old-growth white pines; or a tiny historic cabin. Extraordinary enough that even if the family population explodes, individuals will be content to share.
For example, about 200 descendants of the late Annis Richardson return every year to three breathtaking pink granite islands in Georgian Bay near Pointe au Baril, which are held by a Canadian non-profit organization that Richardson established in 1949 before her death. With three cottages and six sleeping cabins, there are enough beds and refrigerators to accommodate as many as 30 cottagers at a time, which means that most members can book at least a week at the cottage each summer. The annual membership assessment is less than $200 U.S. and pays for fixed expenses such as taxes, insurance, and utilities. Each person, other than those under the age of six, also pays a minuscule per diem for each vacation day at the cottage—a sum that generally helps to pay the cost of cottage maintenance. Non-payment of the membership fee means that cottagers lose the right to book time that year.
Farther east, in the Kawartha Highlands, a majestic three-acre peninsula of Canadian Shield with 1,500 ft. of waterfront and towering white pines has been operated as a cottage non-profit since the 1960s. The Toronto-based matriarch and patriarch who established it bought the vacant land from the Crown in 1946 for $100 and built a 400 sq. ft. log cabin. During the 1960s, when it was apparent that their children and grandchildren were deeply attached to the sandy cove and the rocky swimming point at the tip of the peninsula, the family, who asked not to be identified, transferred the entire property into a non-profit. Today, roughly 35 adult members and a brood of children share the rustic original cabin and three sleeping cabins.
Unlike the Pointe au Baril non-profit, this family made the decision early on to have a two-tier membership system for heavy users versus day trippers. So-called primary users would be those family members who regularly cottage there and manage the property. Their annual membership dues currently stand at $350. Other members —typically those who opted to buy their own cottages nearby, whose spouses were less interested in cottaging with the in-laws, or who eschewed the rustic facilities (no running water, no hot water, just an outhouse) —pay dues of only $20 a year. They have rights to visit during the day for a swim off the point to allow the kids to play on the sandy beach. Far-flung relatives, such as some cousins in Atlantic Canada who have less opportunity to get to the cottage, also qualify for the $20 membership tier but can overnight there. Under their bylaws, children who are direct descendants can be independent members at age 18. Spouses and stepchildren can become members only if the membership votes them in.
With only about a dozen primary members (two of the patriarch’s four children and their spouses, three of the patriarch’s 12 grandchildren and their spouses, and two great-grandchildren), there is no concept of booking exclusive time at the cottage. “There is no mechanism, even, to book time—we expect it to be used by multiple groups,” says one grandchild and board member, Jim, 46. “It really is a close-knit group.” In fact, families can leave their belongings on designated shelves in the cabins and kitchen from weekend to weekend. “If there is not enough room in the cabins, people sleep in tents, so we have never had to say that people can’t come up.”
However, he recognizes that the next generation of great-grandchildren number some 17 already, most of whom are not yet primary members, and questions of booking time in advance may arise in the future. But it is unclear when the crunch might arrive. Many family cottage compounds find that the cycles of lower use, when the youngest generation is comprised of kids in their late teens and early 20s, combined with natural attrition, mean that an unmanageable demand does not materialize as soon as expected. For example, of his four siblings only Jim is a primary user.
Eventually, demographics can force the need to sell such compounds—too many members and too little space. At that point, according to Arthur Drache, whose law practice specializes in the tax treatment of non-profit organizations, there would be no taxable capital gain on the property, because it is held by a non-profit. However, if the board of directors voted to wind up the non-profit, the capital would be distributed to the current members, who would each have to pay capital gains tax on half of the gain at their individual marginal rate. The members could, however, also claim a refund of the membership fees they personally paid throughout their lifetime from the proceeds of the sale of the cottage and that refund would be tax-free.
An alternative plan to selling the property, suggests Drache, would involve a change to the membership bylaws, delaying children’s eligibility to become independent members until their parents’ death—meaning that each family unit would have to work out its own sharing of allotted time at the cottage.
Clearly, for this communitarian scheme to work, members need a solid set of bylaws establishing rules. One person needs to make sure that the non-profit files a tax return each year, even though it would report no income. Non-profits also have to be careful not to subsidize members who are unable to pay their dues, or be in danger of losing their special tax status. Therefore, a means to enforce non-payment of dues is essential. One option, however, is to pay less financially secure members for maintenance work.
One downside of a non-profit is that a renters’ mentality can set in, allowing maintenance to slip, despite the best efforts of the board’s maintenance committee. The Kawartha Highlands cottage members have stalemated several times on whether or not to replace the boathouse, which one member admits is an eyesore. “People seem worked up about an issue one summer,” says Jim, “but by the time the next summer rolls around, they mellow and the issue goes away.”
This article was originally published on May 17, 2004