As Ontario’s cottage country ages, its largest generation of owners faces challenges in handing down their properties.

Cottages in communities such as Muskoka and Haliburton may no longer be passed down, because the children of baby boomers may not be able to afford the capital gains taxes.

“I think we’ve seen this trend happening over the last few years and people hope and dream that they can keep them,” said Troy Austen, a real estate sales representative with Team Haliburton Highlands Re/Max. “I had people in here the other day and they haven’t even been up in 10 years between the brother and sister, but they’ve still hung onto it forever. It becomes emotional.”

When selling, in general terms, cottage owners must pay tax on half of however much the cottage has appreciated in value above its base cost. Any improvements owners have done will raise the base cost above the original purchase price. The taxes owed can still be debilitating when the property is transferred within the family.

Some will use life insurance or other means to pay off capital gains taxes for their children. But, with prices climbing — the average Muskoka cottage is now $1.5 million — it’s not always a seamless process.

“Typically, if somebody couldn’t afford to pay the capital gains on a cottage, they probably couldn’t afford to keep it anyways,” Austen said. “There are people who can’t afford to do it.”

“A lot of people bought cottages in the ’50s and ’60s for low amounts and they’ve really appreciated. In some of the hot cottage areas, you could be looking at appreciations in the millions of dollars,” said Cynthia Caskey, TD vice president, branch manager and certified retirement planner.

Raymond Selbie, a cottage-country wills and estate lawyer, warns that if families don’t plan ahead for the capital gains taxes they’ll have to pay when the property changes hands, children may not be able to afford to control their own inheritance.

“The taxes often outweigh the ability of the estate to flow the property,” Selbie said. “One of the worst-case scenarios is if there’s not enough funds in the estate to pay that large tax bill because there was not proper planning,” added Prashant Patel, RBC’s vice-president of high net worth planning services.

As a result, many properties can no longer stay in the family.

“I noticed this year, I’ve been pricing a lot of stuff that has been in the family for sometimes 80 years,” Austen said, adding that children are now more strapped for money than their parents were when they inherited or purchased their cottage decades ago.

Caskey, who also serves as a portfolio manager with TD, advises families to have tough conversations about the future of their cottage.

“A big reason that the kids may be enamoured with the cottage is because their parents are paying for it,” Caskey said.

“When the kids have to pay for it — taxes and maintenance and upkeep — often they choose not to continue with the family cottage. And I think knowing and understanding their stance up-front may help parents decide what route they want to go down in terms of planning for the cottage itself as well as the tax implications.”

Growing concerns over real estate and money make it harder to avoid family disputes between siblings than in generations’ past. “Sometimes there might be four kids or three kids and one or none have money, so that makes it really difficult,” said Austen.

There are ways to plan ahead, though.

Parents can place their children on the cottage’s deed as co-owners early, triggering the capital gains tax now and spreading it out in phases so that the tax bill is smaller when the property is fully transferred.

Or they can transfer it before death entirely.

“If there’s expectation that the cottage is going to significantly appreciate, then maybe you transfer the cottage now and then that way the appreciation is not in the parents’ name, it’s in the children’s, and then you’re deferring the tax until when the children sell it or when they pass away,” said Patel.

Parents can also sell the cottage to their kids through a promissory note or IOU, which can spread the cost of the capital gains tax out over five years.

If the cottage has appreciated more than the parents’ home, it can also be worth declaring it their primary residence, rendering its sale or transfer tax free.

Loading... Loading... Loading... Loading... Loading... Loading...

“Everyone has to do their own math to determine which property is most beneficial to use as your principle residence,” added Patel.

Still, the looming influx of baby-boomer cottage transfers will create uncertainty in the market and parents must plan for powers of attorney, according to Caskey.

“Every day they (baby boomers) are a day older,” she finished. “They’re really redefining the cottage market and so we are in some ways in uncharted territory.