Timely template letter: Help clients keep cottages in the family

(August 2005) Now that the summer is here, many of your clients may be spending their weekends at their family cottages. However, many may not be aware of the potentially large tax liabilities in store if the cottage is passed down to their heirs. Use this customizable template letter to bring this matter to their attention and let them know that you can help.

[Open as a Word document]

Dear [Client’s name]

Now that the summer is here, many Canadians will be spending their weekends at their family cottages. In some cases, these are places where friends and families have gathered for generations. It doesn’t matter if it’s a simple cabin by a lake or a luxurious summer home — the value is almost immaterial compared to the significant emotional investments that have been made over the years.

If you have a cottage and want to make sure that your loved ones can continue to enjoy it in the years to come, there are some important steps you should take to make sure that this pleasant summer ritual doesn’t end with you.

In Canada, principal residences are not subject to capital gains taxes — in most cases, when you sell your home you will not have to pay any taxes on the amount it has increased in value since you first purchased it. Unfortunately, second homes and cottages (if they are not your principal residence) are not exempt — meaning that your heirs may have to pay a significant tax bill in order to keep the family cottage.

Here’s an example to illustrate my point:

Cathy bought her cottage thirty years ago for just $20,000. Real estate values have increased significantly on her lake, and the property is now worth $220,000. If Cathy were to sell or give away her property, half of the capital gain ($100,000 in this case) would have to be included in her income for that year. This would add up to an additional tax bill of about $30,000 for that year — or even more, depending on her marginal tax rate.

Ignoring the problem doesn’t work either. The same rule would apply in the event of her death, since the authorities would tax the cottage as if she had sold it the day she passed away.

Fortunately, there are strategies we can use to help deal with any impending tax liabilities. One popular approach is to use life insurance to pay the taxes so that the cottage will pass directly to the heirs — and since it’s the children who benefit, they can pay the premiums on the policy!

If you’d like to discuss this issue in greater detail, or if you have any other questions about estate planning, I hope you won’t hesitate to contact me at the number above. I’d be happy to help.

Sincerely,

[Your signature]

[Your name]