Could there be a cottage succession silver lining to the COVID crisis? Perhaps—let me show you. Last week, a couple came to my law office to continue their cottage succession planning. Let’s call them Harry and Meghan. They are in their 70s, have a lovely cottage in the Kawarthas, and were finally ready to transfer ownership to their two children. The kids have shown their commitment to the cottage over the years, and they proved their ability to work well with each other last year when we developed a family Cottage Sharing Agreement. Meghan wanted to hand over the cottage now, but Harry was hesitant. He knew that gifting it to them would trigger the capital gains tax. He was concerned that this tax could take too big a bite out of their retirement money.
That concern led to a discussion of their investments. Harry ruefully admitted that their stock portfolio had already taken a hit because of the COVID-19 crisis, another reason to be wary about reducing it further through taxes.
I agreed with Meghan that the time seemed right to pass ownership to the next generation, and confirmed Harry’s caution about capital gains tax consequences. Then I shared with them a strategy for these circumstances that should work out well for the whole family.
I suggested that Harry and Meghan, with the advice of their financial adviser, select some of their stocks that had lost substantial market value over the last few months. At present these were just “paper” losses and Harry was convinced they would eventually recover. But, I pointed out that if they chose to sell them instead, this would crystallize a significant capital loss for tax purposes. This would be set off against the gain on the cottage, and considerably reduce the amount of tax to be paid.
I reassured Harry that since he was so sure the share values would rebound, he didn’t necessarily have to lose the benefit of a bounce back. He could simply wait 30 days after the sale, then repurchase the same stocks just sold to create the capital loss. Effectively, they would have the identical investment portfolio going forward as a safety net for the future.
As a further positive possibility, I pointed out that a recent RBC report warned that because of COVID-19, Canadian residential resale sales could “…dive by 30% to a 20 year low.” The report projects that sellers may then need to make price concessions, with “benchmark prices to fall briefly over the second half of 2020 by an average of 2.9% year over year.” Since cottage values typically follow overall residential market trends, an appraisal this summer may well reflect a comparatively low 2020 fair market value for capital gains tax calculation purposes. In other words, good news for anyone looking to hand down the cottage.
Harry and Meghan were enthused about the prospect of accomplishing their cottage planning goals so tax effectively! They left my office with a bounce in their steps, determined to speak next with their investment adviser and an appraiser. If in fact their capital losses do offset a (likely temporarily) reduced capital gain on the cottage, the actual tax cost of passing it on to the kids will be much less than they feared. If so, they promised to be back soon to sign up the deed.
Not all cottagers will find themselves in the same situation as Harry and Meghan, but for many the coincidence of a currently diminished investment portfolio and a temporarily reduced fair market value for the cottage can combine to create an unlikely but welcome silver lining, an ideal opportunity to seize the day and keep the cottage in the family.
The bottom line? If you are considering handing down your cottage, and think this just might be the right time, then a good starting point is to contact your lawyer. He or she will expertly assess your options and guide you to the best next steps in this very important process.
Peter Lillico is a Cottage Life expert source in cottage succession, and a lawyer with Lillico Bazuk Galloway Halka in Peterborough, Ont.
Please note as this situation is constantly evolving, information is constantly changing. Check back for updates.