The growing complexity of recreational properties is somewhat a reflection of how complex Canadian life has become. As with so many aspects of residential real estate, cottage prices have risen dramatically — especially during the pandemic, though there has been some pullback more recently. Blended families are more common, as are more widely dispersed families. The tax regime has become more complex as well, with a higher inclusion rate for capital gains over the $250,000 personal exemption.
“You’ve got a perfect storm of issues that can arise on what are usually very emotional properties,” Van Cauwenberghe says. “Most people are totally fine to sell mum and dad’s house, but deciding to sell the vacation property can be much more difficult.”
There are some areas of hope, however. Many cottage owners have significantly upgraded their properties in recent years. Advisors need to ask if records were kept on renovations and improvements, because those could significantly reduce the amount of capital gains.
As they look for solutions, Van Cauwenberghe says that advisors need to host a family meeting to determine what everyone’s intention is. A frank discussion can help manage any assumptions that family members may have about a cottage. The parents may learn their kids don’t want to keep it, or the kids may learn how much it costs to run, from maintenance costs to sky-high property tax rates. Dispelling any delusions and explicitly stating goals can go a long way to manage the snarl of issues that could emerge from a cottage.
“We recommend that advisors talk with their clients about their general estate plan every few years, that could be about the legacy they want to leave, charitable giving, and bigger picture issues, but that’s also the point where you would take an inventory of their assets,” Van Cauwenberghe says. “This same discussion can come up with rental properties and businesses, which can be surprisingly emotional for people. But have that general discussion, ask what they own, who their intended beneficiaries are, and that their expectations are. If they have a plan that’s great, but if they don’t then it’s an opportunity to involve the family in a discussion.”
