Transcription
Family Cottage and RecreationalProperty Strategies
Presenter¾Michael Bondy, BA, CA, CFP, TEPPartner, Collins Barrow National Director of SuccessionPlanning for Collins Barrow Certified Financial Planner Trust and Estates Practitioner Speaker on Tax, investing, andProperties.
Family Dynamics and the Cottagey Keep a commoninterest alivey Centre for the family tokeep in touch andengaged with eachother, siblings andparents.
Ingrained into our DNAy A place to relax and get away from the busycity.y Has increased in value over the years, whichshould continue.y Where your children and grandchildren willwant to come to visit you.y A place for the children to build memories.
Death and Taxesy Do the kids want to keep the cottage and arethey willing to pay for it?y They say they do, but if it limits their lifestyle,they may rather pay down debt withinheritance.y Do they want to share it, or does one want itand can afford it more?
Death and Taxesy What do you do with the other children?y If joint, how do they share maintenance costs,etc.; or major costs?y i.e. One wants to upgrade and build biggercottage; the other does not mind the oldcottage.y You choose your friends, not your family.
Death and Taxesy If they get along well, have few conflicts and similarvalues, it might work.y The likelihood of more than 3 getting along is pretty low.y You cannot control conflict after death, so try not to.
Death and Taxesy Tax‐free rollover if left to spouse.y Cottages are subject to capital gains taxes – ½of gain will be taxable.y You cannot transfer for tax purposes atanything less than fair market value.y i.e. Transfer into joint name with kids is stilla disposition unless done properly.
Your Advisors have a plan
Strategiesy The principal residence exemption can be elected onany property used principally for personal use.y Owned cottage since 1991 – cost 160,000;y Sold original house for large gain in 1996;y Sold current condo in 2011 but gain was only 20,000;y Plan on selling cottage in 2015 for 360,000 withgain of 200,000.
Strategiesy Total tax if election on condo 35,000y Total tax if no election on condo 12,000y Total savings 23,000
Strategiesy Do not elect on condo when sold in 2011 butpay capital gains tax on this saley Actual gain 20,000; andy Tax owing 4,600.y Elect on cottage when sold in 2015, asprincipal residencey Gain 200,000
y Principal residence election on cottage:1996 – 2015 20 1;y 1991 – 2015 25; andy 200,000 x 21/25 168,000.y Taxable gain ( 200,000 ‐ 168,000) x ½ 16,000y Tax owing 7,400y Total tax 12,000 ( 4,600 7,400)y
Barriers to SuccessionFinancial capital and understanding:y Human capital and resources.y Advisory capital, many are just afraid of succession andthe issues surrounding it.y Accountant is a quarterback who is afraid to get sacked.
y If you did elect on condo in 2011y Tax owing on sale of condo 0y Principal residence election on cottage:y 2011 – 2015 5 1y 1991 – 2015 25y 200,000 x 6/25 48,000y Taxable gain ( 200,000 ‐ 48,000) x ½ 76,000y Tax owing 35,000y Total tax 35,000 ( 0 35,000)y Savings by not electing on condo 23,000 ( 35,000‐ 12,000)
Divorce and Recreational Propertyy For marital purposes a cottage or recreationalproperty is family property.y So when a child inherits, buys or is gifted thisproperty:y Provided it is used for enjoyment by their family;y Is included in family property even if gifted, boughtor inherited from the parent;y If there is a divorce, ½ of the property goes to thespouse.
Appearances can be deceiving
So Imaginey You leave the property to your 2 childreny One gets divorced and has to pay ½ of thevalue to their spouse.y What do they do now?y A marriage contract may work but it must befinalized before the wedding.
Strategyy If the cottage is gifted during lifetime, lend themoney to the kids to buy the cottage.y You might have to pay the land transfer tax.y Cottage is joint, loan is joint, so at least itreduces the loss by the loan amount.y But after death this stops working as a loan isrepaid or forgiven.
Probate Avoidancey Probate fees in Ontario are 1.5% of the assets.y If the property is joint with your spouse, thereare no probate fees until the last spouse dies.y Don’t throw the baby out with the bathwater.y Transfers to joint name sometimes may leavethe asset out of the will.
Recent Probate Updatey If transferring to joint name the courts assumenot intended to be a legal transfer.y If transferred prior to death to son #1, and nodocumentation indicating intent:y Courts assume the asset should still beincluded in the estate, i.e. Not sole propertyof son #1 but sibling beneficiaries have aninterest in the property.
Probate Updatey So document your intent.y If your intent is solely for probate purposes itsnot a disposition for tax purposes.y May lead to estate litigation.y Alter Ego trust may be set up to avoid probatewithout risk of joint problems.y But you still owe the capital gains tax ondeath.
Cottage Tax Strategiesy Consider life insurance but costs oftenoutweigh the benefits.y Maybe kids will pay premiums?y Transfer the cottage to the kids before thegain gets to large.y Transfer outright to joint name.
Cottage Tax Strategiesy We recommend you take a promissory notefor divorce and creditor proofing purposes.y A joint tenancy puts all of you at risk if there isfinancial or marital difficulty.y Make your intent clear ie. must be a realtransfer to minimize capital gains tax.y A co‐owner may go to court to force the sale.
Cottage Tax Strategiesy Consider a co‐ownership agreement to outlineexpectations for:y Who pays the bills;y Who cuts the lawn;y Who pays for renovations; andy Restrictions on sale, i.e. parent mustconsent to sale.
The kids have to agree
Cottage Trusts – Intervivosy Still a deemed disposition so the tax must bepaid.y Works if you are buying a cottage now or if again has been small to date.y Take back a demand mortgage to defer anygain over 5 years.
Cottage Trustsy Mortgage also gives you more control over theproperty.y Trust normally needs to be dissolved after 21years, i.e. assets transferred to the kids or taxpaid on the accumulated gain.y May protect you somewhat against a claim bythe child's spouse.
Cottage Trustsy Parents maintain control over the propertyduring the life of the trust.y Should set out clearly the costs of operationand who pays what, who gets whatever when.y Granting a life interest to parent no longer analternative.y Normally funded by a loan or gift from theparents.
Cottage Trustsy Child may use the principal residenceexemption but if one child uses it, all trustbeneficiaries are deemed to have used it.y Consider using separate trusts but that maymake ½ of the value open to spouse claim in adivorce.
Pros and Cons of Trustsy Costly to form and maintain.y Record keeping requirements.y Only lasts for 21 years.y Deals with capital gains and probate issues.y May be able to skip a generation tograndchildren.y Transfer is taxable so not so good if large gain.
Testamentary Trusts – Post Deathy Leaves the cottage to a trust for the beneficiaries.y Still must pay tax on death.y Must be funded by the estate and costly to maintain.y Who inherits it when it must be decided?y Complicated and ugly but it does work in someinstances.y Can skip a generation but must have an end date.
Tips ‐ Recreational and PrincipalResidencesy Keep copies of documents for any renovationcosts, i.e. kitchen, additions, and originalpurchase documents.y No need to keep expense records for repairsnew roof, carpet, etc.y Every time you sell a principal residencereview if you should elect principal residenceexemption.
Tipsy If you bought prior to 1982, there is a way toincrease your cost base to the value in thatyear if:y Both you and your spouse owned thecottage and principal residence individually;y Prior to 1981 each spouse had their ownprincipal residence exemption;
Tipsy Ensure that at the time of death on sale thatthe property is held in only 1 persons name;y If you bought before 1971, then you needan appraisal and your gain is measured fromthat date;y You may have used your 100,000 capitalgains exemption to increase your cost base.
US RECREATIONAL PROPERTY‐THE GOOD‐
‐THE GOOD‐y Lowest prices in years and Canadian is abovepar? Disconnect between US and Canada.y Low interest rates but must borrow in Canada.y Prices seem to be at bottom but no rush, youprobably have a couple of years in some cases.
‐THE GOOD‐y Florida Keys, and Miami Beach are recoveringbut Cape Coral area has 17 years of inventory.y Sales in the Keys have 1/3rd of people movingthere to upgrade, 1/3rd buying second homes,1/3rd investors buying to flip and make 30‐50k.y Prices have leveled off with some actuallystarting to increase in more valuable areas.
‐THE GOOD‐y In the Keys you can buy waterfront propertiesstarting at 300,000 and non‐waterfront from 150,000 ,. a 50% discount from the highs.y Water temperature – 75 to 90 degreesy Air temperature – 70 to 90 degrees almostalways!y Cottage country for Florida, but no beaches.
‐THE BAD‐y If you rent you must file US tax returns or besubject to 30% withholding tax on rental.y State tax of 11% is charged on rentals to shortterm tenants of your property.y Must fumigate often, bugs are big!y Carrying costs, condo fees, taxes, insurance,hydro can be costly.
‐THE BAD‐y Watch out for Hurricanes! (Buy newer, theyare built to withstand)y Salt water and humidity is hard on everything.y Mortgages are not available in US but you mayuse a Homeline loan on your house in Canadaas security for a Canadian Property.
‐THE UGLY‐y Buying a property can be a painful especially ifit is a bank foreclosure or short sale.y Once you make an offer you don’t know howlong it will take to be approved.y You should be careful about the following:y Don’t buy a house in a ghost town;y Have your accountant review the condocorporation’s books to ensure solvency;
THE UGLYy Review condo corporation’s minutes to seeif there are any special assessments coming.y Ensure you have a home inspection if at allpossible!y If it is part of a golf course community, makesure the golf course is solvent and not goinginto bankruptcy or financial difficulty.
Bondy’s Laws of Real Estatey Location, location, location!y Easy to get to, by car if a cottage.y The less stop lights the better!y Small town environment.y Safe for anyone to stay alone, even Grandma.
Bondy’s Laws of Real Estatey Always safer if it’s just 1 road or limited access.y Access to airports should be 1 – 2 hour drivemaximum.y Nearby to grocery, and other necessities.y Buy waterfront or as close as possible if youcan, they aren’t making any more of it!y The right place at the right price is key.
Fish when the fishing is good
Bondy’s Laws of Real Estatey They can build a lot of golf courses in Florida(millions of areas of bare land)y There are thousands of condos and propertiesnot on or near the water that are extremelycheap. Buyer beware!y You often get what you pay for.
BUT.y In Canada consider lake access so buy across the street orvery near the lake. Lake front is often too expensive.
399,000 Canal Front, Keys
800,000, pool, hot tub, 75’ dock
Otter Lake, Parry Sound, 800,000
900,000, dbl lot, infinity pool
4 BR, 2700 sf,
Grand Bend‐ 900k, 2 bedroom
3,500 1br, with outhouse
Sale of US Propertyy Taxable in the US on your gain in US dollars.y Withholding tax of 10% of gross sale proceedsunless you get a certificate that allows less taxto be withheld.y OR sale price under 300k and used by thebuyer as principal residence.
Sale of US Propertyy Keep your signed original documents as theywill be needed to obtain a tax certificate thatallows lower rate of withholding.y Must file US tax return to get refund.y Then report Canadian gain, pay tax in Canadaless the tax paid in the US.
Death and US Estate Taxy Obama passed it soexemption is now 5minstead of 1m.y Expires again in 2013unless extended thenexemption goes backto 1m.
US Estate Taxy Estate tax returns are complicated and youcannot deal with or sell the asset until youhave filed the return.y YOU MAY BE EXEMPT IF:y If total assets owned in the US are worth 60,000 US.y If total assets of an individual are 1.2 millionin US dollars.
Estate Taxy Assets subject to estate tax in the US include:y US real propertyy Vehicles, boats, jewelry, personal effectsy Direct shares or bond investments, i.e.Apple, etc.y Whether held personally or in RRSP’s eventhough held in Canada
Estate Taxy Do I really have to worry?y Yes, if a total individual total net worth ofover 5 million dollars, 10m if married.y Remember for Estate tax assets Lifeinsurance proceeds are included in your networth.y You still need to go through the pain of filinga US estate tax return
Estate Taxy If you have significant net worth, the unifiedtax credit is reduced by the pro‐rata share ofyour world wide assets.y If you are subject to estate taxes the rate is35%.y If you have a Canadian gain on yourproperty you can use this as a tax creditagainst the tax owing.
Simple ExampleWorld Wide AssetsLife InsuranceTotal World Wide Assets6 million2 million8 millionUS Real EstateUS Investments & OtherTotal US Assets1.5 million.5 million2.0 million
If US assetsEstate TaxPayable 2 million 249,000 1 million 114,450 500,000 47,625But if you are married, the property left to yourspouse, and not held jointly.The unified tax credit is doubled and in the abovecases no US estate tax is payable.
US Strategiesy Hold title as tenants in common and not joint tenants(most common in Canada) or as joint with co‐ownership agreement.y No right of survivorship but you need to prove thatyour spouse had their own funds to contribute to thepurchase.y This stops the IRS from including 100% of theproperty value in the descendants estate for taxpurposes.
Bewarey Non‐recourse loan agreement reduces the value ofthe estate by the amount of the mortgage.y Not used so commonly anymore as no US lender.y Watch for direct investments in US securities.y Your advisor can buy ADR’s, special funds, etc. foryou that are not treated as US securities.y US securities if held in Canadian corporation are notsubject to estate taxes.
Bewarey Single purpose corporations no longer work,are not eligible for ½ capital gains tax rate inUS.y Do not use corporate ownership as there isrisk that if for personal use to be deemed tobe a shareholder payment so 100% taxable.y DO NOT USE US LLC as significant tax problemsarise.
For worldwide estates over 10my Strategies are used to confuse the IRS so fewof them are bulletproof.y Form a Canadian Trust but be careful thatfunds are loaned to fund it and that the parentdoes not look like an owner.y Parent may have to pay fair value rents.
For worldwide estates over 10my Form a US limited partnership owned by aCanadian Limited partnership funded by aCanadian Trust.y The partners are the children so that any gainsflow to them or the parents but may not workif IRS sees through the partnership.y Hide the ownership behind as many barriers aspossible.
For worldwide estates over 10my Beware US gift tax which applies to USproperties, ie. You cannot gift your property orfunds during you life to be used to buy USproperty.y Very complicated and detailed professionaladvice is needed and IRS may still look throughit.
Other Alternatives
Mexicoy Mexico's charm: coastal towns, naturalbeauty, and colonial and cosmopolitan cities.y Affordable and beautiful beachfront propertyy Rich and diverse historyy Quality medical care/prescriptions at afraction of the costy Cable TV, high‐speed Internet, cell phoneservice
Mexicoy Prices are still strangely high in many placesrelative to the US. Ie. Same price for condo asin Southern US.y Currency value is down due to US dollar fall.y Financing is very expensive, and closing costscan be up to 20% of the cost of the property.y Right now not the deal that it used to beexcept in certain remote developing areas.
Mexicoy Cost of construction‐ 65 to 120 per squarefoot.y Ocean front lot‐ 50,000 to 300,000.y Property taxes and insurance‐extremely low,under 1,500.y Other costs of living are extremely low so theperfect place if you want a low cash burn rate.
Tips and Traps of Buying Propertyy The lower costs of property and the lower costof living may be just the answer for those ofreduced financial means after the recentdebacle in the stock market.y Recently reported violence in border citiesfinally are driving values down.y Spanish is necessary and not that hard tolearn.
BarriersBar riers to SuccessionSucce ssion N oott memm embersbers of CAC AF É.SSmmalleritiesaller comco m mmuunnitiesSSuuppportpo rt ggrouro upp is frienfriendsds in d iversebbusinessesusin esses N o resources or mentoringmentoringavailable other than D ad.o therad .
Tips and Traps of Buying Propertyy Don’t drive at night anywhere in Mexico, thereare cows and horses on the road.y Don’t wear flashy jewelery or expensive items,less is best.y Especially be careful to travel in daylight hoursin border cities.
Mexicoy Foreigners are not allowed to directly own realproperty within 50 kilometers of the beach or100 kilometers from an International border.y There are 2 methods that allow you to ownproperty in the Restricted Zone.y Fideicomiso or Bank Trust.y Mexican Corporation‐if Business/rental related
Fideicomiso or Bank Trust.y A Bank Trust established to own personal useproperty.y Established with a Mexican Bank and costs 3500 to 7,000 to set up.y Annual fees 450 to 600 to file.y Lasts 50 years with 50 year possible extension.
Fideicomiso or Bank Trust.y Generally not for business purposes howeverthe property can be rented.y You and your spouse are beneficiaries of theFideicomiso and your children may also benamed beneficiaries.y So transition to beneficiaries is easier.y Still subject to Capital Gains tax in bothCanada and Mexico similar to USA.
Other Countries‐Bahamas.y Bahamas‐Residency card allowed if youpurchase a residence for more than 500,000US. Cannot work unless work permit obtained.y As an island, cost of living is very high. All inUS dollars.y Easy to own property and take title.y Prices are still fairly high compared to the USbut have fallen dramatically.
Other‐Belize, Costa Rica, Turksy Determine if common law country, Britishbackground, or Civil Law‐Spain or FrenchBackground.y We are familiar with Common law, and CivilLaw is substantially different. Civil based onlegislation not case law. No presumption ofinnocence. BE CAREFUL!y Prices are down, but surprisingly higher thanUS sometimes.
Collins Barrow Can Help!If you would like to discuss anything furtherplease contact:y Michael Bondyy(519) 679‐8550ymbondy@collinsbarrow.com
Divorce and Recreational Property yFor marital purposes a cottage or recreational property is family property. ySo when a child inherits, buys or is gifted this property: yProvided it is used for enjoyment by their family; yIs included in family property even if gifted, bought or inherited from the parent;
