The family cottage is where you and your family spend time together, building memories and enjoying each other’s company. It’s the one place that everyone can go, to relax and take a much need break from everyday life.
It’s no surprise then, that one of the main considerations regarding a vacation property is ensuring that it’s transferred to loved ones for ongoing use, while protecting it from outside risks.
It's the topic of many books and articles and yet no one has devised the perfect way to make sure that everyone in the family gets a fair share of the cottage, while also protecting it for generations to come.
In the past, only very affluent families had multiple homes but, the number of people who can afford vacation properties is growing, every year. And why not? There is nothing better than owning a chalet for weekend ski trips or a buying a Phoenix townhouse, on the golf course, so that you can enjoy warmer weather when the winter finally rolls in.
The problem is, this increase in ownership also comes with an influx of families who must consider these vacation homes when creating their estate.
If you are the owner of a vacation property, one of the first things you should take into account is taxation - you want to make sure that you’ve protected your vacation property and reduced your tax liability as much as possible.
While there are many tools available to help achieve these objectives, such as the Principal Residence Exemption, there is one important factor that many families fail to consider when planning for the cottage or vacation home, and that is where the vacation property is located.
Why is this important? It's important because the way you protect your assets is going to depend on the laws upheld in the province, state and/or country where the asset is held.
Internationally Held Assets
Internationally held assets, such as vacation properties in the United States (US), are liable to both US and Canadian estate taxes. Failure to structure these assets within a larger tax scheme will inevitably cause their real values to be reduced.
Furthermore, by owning property in the USA, you will have two estates that will need to be settled, adding considerably to the amount of time and money required.
The best solution, when you own international property in the United States, would be a trust. Trusts do not go through probate and they're not challenged under the estate legislation. This will allow you to circumvent the problem and eliminate your exposure to US estate tax, which can be a much as 45% percent taxation, at present.
Assets Held in Different Provinces
Similarly, laws can differ between provinces. For example, if you own a vacation property in British Columbia (BC), by law, that property must be treated differently than if that property was in Alberta. This is because each province, in Canada, has its own legislation. In BC, you must treat all your children in an equal manner while Alberta allows you to divide assets as you see fit.
To illustrate, imagine your family lives in Alberta but has a chalet in British Columbia that you use on weekends for skiing. Now, imagine you want to leave one child a higher portion of the chalet’s ownership because they helped maintain the cottage through sweat equity.
You would find yourself facing difficulties because you're doing dealing with two pieces of legislation. In Alberta, you would be allowed to treat your children in an “unequal” manner but in BC, you are not and because the two legislations are counterintuitive they don't work together appropriately.
That is why it is so important to consider the location of your assets and look at each piece of applicable legislation. You need to make sure that you plan for those legislative differences, in each jurisdiction, so that you can effectively minimize your liabilities and protect your legacy.
Are you looking for guidance with jurisdictional obligations regarding your estate? Contact us today for a complimentary consultation and we'll help you find the right techniques to meet your family’s objectives.