radio show excerpt on cottage sucession

as part of the Saturday Beyond Funds Radio Show, I reviewed an excerpt from an article on cottage succession planning, which I found very informative...

here is some of the content...

"The Family Cottage - All is Calm and Peaceful, Or Is It?Douglas Buchmayer, May 31, 2006
Some families are defined by the cottages they keep. Others wish they were. In what seems to be one of the most popular sources of family recreation, the cottage is often regarded as the family jewel, emotionally and otherwise. But families (like cottages) tend to age over time, and families (unlike cottages) tend to get endlessly larger and more diverse. Few families can imagine not being able to “go to the cottage”, but almost all families recognize that over time the dynamics of family ownership will soon become more complex. If not property planned, succession of the family cottage can very well become the family nightmare.

Cottage succession planning normally involves three major considerations: capital gains tax exposure, shared ownership and use, and the desire for perpetual family ownership.

Cottages that have been family owned for decades were usually acquired at a fraction of what they are worth today. There are several methods available for dealing with the capital gains tax liability to make it less cumbersome on those who have to pay it. One common approach is for the parent owners to buy life insurance in an amount capable of paying such liability. Another method is to gift the cottage to the children now. Parents could do this while taking back a life interest, thus ensuring they will have guaranteed use of the cottage for the rest of their lives. Gifts of real property to family members attract no land transfer tax. Under the income tax act, however, such a transfer will trigger a deemed disposition at fair market value. Although the tax liability becomes immediately payable by the parents, at least the value of the cottage is effectively “frozen” until (if ever) the children decide to dispose of their interests in it. Furthermore, the tax circumstances of the parents are more predictable today than they may be upon their deaths.


Whenever land is owned by two or more persons (not being spouses) a written joint use and ownership agreement should be in place. The roles, rules and responsibilities of those who choose a common roof are often assumed but rarely defined. These issues and many more can be dealt with in a simple joint use and ownership agreement. Buyout provisions, dispute resolution formulas and life insurance requirements, to name but a few, are ironed out in advance. The agreement can be registered against the land to ensure longevity and enforceability.

Some families toy with the notion of keeping the cottage “in the family”, suggesting perpetual family ownership. Co-ownership together with a joint use and ownership agreement is perhaps the simplest method of encouraging perpetual ownership, but it lacks the bridge of continuity. Corporations and family trusts offer better solutions.

Corporations are separate entities and have indefinite existences (until dissolved or amalgamated). There are two types of corporations: the for-profit and the non-share corporation. The term “corporation” is often synonymously associated with business corporations; that is, corporations that exist for the purpose of making a profit. The non-share corporation, however, exists for the purpose of fulfilling non-profit objects. Whether you decide to hold a cottage in a business corporation or a non-share corporation will depend on your goals and objectives.

A simpler and less regulated method of ownership is a family trust. The benefit of holding a cottage in a family trust is there are no filing or reporting requirements. The biggest problem with the family trust is the 21-deemed disposition rule, which would essentially realize the capital gains on a cottage property every 21 years. Furthermore, the rule against perpetuities will prevent the trust from having an indefinite existence as the trust must collapse and its property vest in a person within “a life in being plus twenty one years”. This means that the trust can only exist for the longest lifetime of any one beneficiary presently alive, plus 21 years.

Whatever cottage families decide to do as they contemplate the needs and desires of the next generation, they should only proceed after careful consideration and proper professional advice. The cost of such advice will pay for itself many times over when the planning envisioned achieves the balance and harmony sought to be gained."

It was published by Douglas Buchmayer, of Drache LLP, in May, 2006

I think this will continue to be one of the biggest estate planning issues over the next few years, especially in this area, with the massive number of cottages around London.