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Hello,

I'm helping my father with his estate planning. He has a primary residence with (200K mortgage remaining) and a cottage property (free and clear). He's only 68 years old. Plenty of years left. But he's quite adamant to structure this now.

He wants to transfer the property to our names to make things easier when settling his estate. None of the children (adults) have the money available to purchase the properties. And No child will be residing on the property. He would have to remain on title to continue paying the mortgage.

1) Primary residence. What are the tax implications when adding his children to the property?

2) Cottage property. I understand there's no way to avoid any taxes. Wondering if the best method here is to remove his name and transfer the property to his children. We will figure out a way to cover his capital gains. Other than that, any other tax scenarios I should be aware of.

Thank you in advance for helping me out! I could really use some guidance.

Cheers,

Geoff
 

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I'm not an accountant, but adding the kids to the primary residence will make it susceptible to capital gains. If it's owned by as a principal residence, it's tax free. Best to leave it in the estate probably.

As to the cottage, if there are a lot of kids, he could probably gift it to the kids and then they'd be responsible for the capital gains. That being said, a good accountant can make 50k of capital gains basically disappear tax free in many cases (okay, I may be exaggerating a bit), so the transfer could be basically tax free if there are a lot of people involved.

Of course, I'd talk with an accountant...it's why I pay them personally.
 

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This can get a little complicated depending on the purchase dates and gains on the two properties. First, your father has a choice of which property he declares as his principal residence.
Depending on which has the most gain in value. Also he may declare his house for a portion of the time and the cottage for the rest of the time.
For example if he bought the house in 1993 and the cottage in 2000, he could use the house as PR from 93 to 2000 then the cottage. Also many other potential scenarios.
Aa far as adding kids to the title of the house, if this is the property he is going to declare as PR, adding the children to title will not affect the PR designation.
It would be easier to give suggestions if we knew the purchase dates, prices and current values of the two properties.
Note there are many disadvantages to adding kids to title of a property he is continuing to live in and pay the mortgage on.( and few advantages). Generally I would not recommend this but there are exceptions.
 

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Could be lots of potential tax liability at stake for your father and for his children depending on the circumstances. I would seek out a good tax accountant to gain an understanding of your most tax efficient path and then move forward. The cost will be minimal compared to the pain if you get it wrong for whatever reason.
 

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These kind of schemes have come up in other threads. The usual conclusion is that you shouldn't do it - there are too many tax problems, and potential estate problems. Also, if any of the children own their own primary residence, this "gift" will become a taxable property, as you can only have one primary residence at a time.
 

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Another complication that could arise is if one of the children gets divorced, since the spouse would then have a partial claim on the property which would have to be bought out.
 

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Another complication that could arise is if one of the children gets divorced, since the spouse would then have a partial claim on the property which would have to be bought out.
Not necessarily - at least in Ontario. Gifts and Inheritance received during a marriage are generally not included into the net family property calculation.
 

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True enough in some provinces, but it opens the property up to creditors if one child has debt issues. It can also cause problems if one child dies and the others have to deal with his survivors or worse the government if he dies intestate and has minor children.
 

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I second talking to an accountant for the best advice. It can get complicated with kids on joint title of something with a mortgage. Talk to the mortgage company as they will have some say on how much beneficial interest is transferred and may insist the kids be on the mortgage. Someone will have to pay cap gains on any sale to the kids.

It has been advised before of joint title issues when it comes to debt liabilities and marriage breakups. It happens despite best intentions. And even that aside, joint ownership will almost always result in disagreements about repairs, upgrades and usage. Most times, 2 families cannot even agree which movie to watch on Netflix. How are they supposed to agree on important matters?
 

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A few years ago we had a tax planning session with our accountant. One of our children was living with his girlfriend at the time. We mentioned that we might help them buy real estate. Our accountant immediately said be careful, you need a lawyer and you have to set this up properly to protect the investment.

It seems that she had been in several accountant/legal professional conferences lately and this was one of the key subjects. The challenge being with division of assets when the relationship ends. Her cautionary note was that the is a way to do this, and a many ways screw it up. The goal being to keep the money in the family so to speak in the event of a breakup after a short period of time.

Provincial legislation varies. Just because something is a go in one province does not mean that it is the same in all provinces.

And after all that, there are CRA implications that could be substantial depending on increases in property values over time.
 

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Ended up as double post. Seems that a duplicate post cannot be deleted in its entirety. That is the case even though, if one hovers over the "edit post" button one sees the words "Edit/Delete".
 

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Another complication that could arise is if one of the children gets divorced, since the spouse would then have a partial claim on the property which would have to be bought out.
Not necessarily - at least in Ontario. Gifts and Inheritance received during a marriage are generally not included into the net family property calculation.
Despite Synergy’s observation, the note of caution sounded by JAG is well-founded. I’ll not speak for Ontario, but I would guess that, even there, matters are not so clear cut.

In BC, in 2013, the Family Law Act replaced the Family Relations Act. The changes wrought are highlighted in recent decisions. A few examples (not that anyone here will find what follows interesting in the slightest, but I’ll post it anyway) follow.

Here’s a link to a recent BC decision.

http://www.courts.gov.bc.ca/jdb-txt/sc/17/12/2017BCSC1226.htm

The judgment runs to 65 pages. It says, in part (my summary):

The Family Law Act [“FLA”] made significant changes to the property division regime in British Columbia. Under the Family Relations Act "family property" was identified as property owned by one of the parties and used for a "family purpose." The FLA moved British Columbia to an excluded property regime in line with other provinces, where property is divided based on its characterization as either "family property" or "excluded property." However, unlike Alberta, Saskatchewan, and Ontario, the FLA did not expressly abolish the presumption of advancement, which left open the question: does the presumption of advancement operate within the FLA’s property division regime? Two lines of authority developed that grappled with that question. One set of authorities held that the FLA constituted a "complete code" and consequently displaced the common law presumption of advancement for the purposes of property division. Another set of authorities concluded that the FLA was not a complete code and that it did not, therefore, displace the presumption. For nearly 50 years the presumption of advancement, as between husbands and wives, has been consistently questioned and steadily eroded. Here, the narrow issue was whether the presumption of advancement could exist or co-exist, at this time, within Pt. 5 of the FLA. It would appear it cannot do so in a way consistent with both the stated and the intended objects of Pt. 5 of the Act. Section 96 of the FLA allows the court to, in a sense, "override" the exclusive property regime if the court concludes that it would be "significantly unfair" not to divide such excluded property.

Here’s one more.

http://www.courts.gov.bc.ca/jdb-txt/sc/18/03/2018BCSC0332.htm

The text is 92 pages, but for the purpose of this discussion I would summarize the judgment thus:


When the excluded property model was promulgated in the Family Law Act, the purpose was, in part, to align with people’s notion of fairness. The new model places the onus on the party seeking an exclusion to prove with clear evidence that property is excluded. However, the exercise was not meant to be overly complicated or burdensome. The objectives of the new model must be considered together with the reality that many parties will co-mingle excluded property with family property over time, including using excluded property to purchase other property or refinancing excluded property to purchase other property. The court must also consider evidentiary difficulties inherent in family law actions. Where documents are less than complete, the credibility and reliability of the parties’ and other witness’ testimony will become critical in the overall assessment. While the FLA does allow parties to keep "what is theirs," it also accepts that families are a joint endeavour, not a business between arm’s-length parties. As a relationship grows longer, the responsibilities, capacities, and assets of the spouses will often grow more intertwined. The role of the court on the breakdown of a relationship is not to tease apart these threads and restore the parties ab initio, but rather to address the consequences of the relationship’s breakdown and seek fairness in that light. Here, both parties contemplated a precise and mathematical tracing that ran against the object of an excluded property regime.

The following case illustrates one aspect of the law in BC, namely, that “excluded property” generally remains “excluded” only to the extent of its value when received or brought into a marriage (or marriage-like relationship). Any increase in value will be considered to be family property, subject to a presumption of equal division. Below, I have quoted 2 paragraphs from the text that explain.

http://www.courts.gov.bc.ca/jdb-txt/sc/17/09/2017BCSC0945.htm

[37] Counsel for Mr. Bamford correctly submits that the increase in the value of the Family Home and the Edward Jones Portfolios constitutes family property that is to be divided equally unless the court finds that an unequal division would result in a significantly unfair result: FLA s. 95.

[38] The appraisal evidence establishes that at the time of the marriage between the parties, the Family Home was worth $210,000 and that, at the time of separation, it was worth $440,000. The increase of $230,000 constitutes family property. (italics added)


Even in Ontario, one can conjure up hypothetical cases in which it seems (to me at least) doubtful that a court would countenance a gift or inheritance received during a marriage not being included into the net family property calculation. Let’s imagine a young couple in their early 20s. Husband receives by gift or inheritance a house worth $100,000. The parties move in and live in it until separating 50 years later. Now, with the parties in their early 70s, the house is worth about $2 million and it’s the parties’ only asset worth mention. Does husband get to keep the house and its increased equity, with the wife entitled to nothing?


I have no doubt that in BC, under the FLA, in the above inheritance or gift scenario, if the property was gifted directly to the child and the child was subsequently involved in a marital breakdown, the property would be excluded property, but the amount of any increase in value of the property during the relationship would be subject to division as a family asset.

As Ian suggested, in post #10, some pitfalls can be avoided with careful legal and tax planning. Using the above example, if the property was instead gifted to a discretionary trust for the benefit of the child and his or her children, only the change in value of the trust interest during the relationship would be subject to division. If the child’s entitlement in relation to the capital of the trust were dependent entirely on the exercise of discretion by the trustees, the value of the child’s beneficial interest in the trust should be nominal. Accordingly, such a trust could protect any increase in the property value from a claim by the child’s spouse regardless of whether the gift was made before or during the child’s marriage.

As well, the Income Tax Act provides that a trust can claim the principal residence exemption with respect to property owned by the trust, provided that a beneficiary ordinarily resides at the property and a principal residence exemption is not claimed with respect to any other property by the beneficiary, the beneficiary’s spouse, or any children of the beneficiary under the age of 18 (ITA, s. 54). The effect of the definition of “principal residence” in s. 54 is that a trust may own a principal residence. Specified life interest trusts are exempt from tax on capital gains with respect to a principal residence.


For further reading (on the off chance that anyone on cmf has read all of this dreary post):
Protecting Your Children from Their Spouses and Other Conversations to Avoid at the Thanksgiving Table: The Family Law Perspective

From the course: Estate Planning Update 2016
 

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Mukhang pera....excellent post.

The cost of not moving forward in a planned,thoughtful way and without the advice/direction of knowledgeable professionals can result in a great deal of emotional and financial unpleasantness. Friends and relatives can and do provide worthwhile advice but it is sometimes the nuances that can bite you on the backside.

The costs involved in 'getting it 'wrong' far outweigh the costs and the hassle of 'getting it right' every time.
 

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The costs involved in 'getting it right' far outweigh the costs and the hassle of 'getting it wrong' every time.
Thank you ian.

I have an idea you misspoke a bit in the above quote. I think what you intended to express should read: The hassle of 'getting it wrong' are likely to far outweigh the costs of 'getting it right' at the outset. Or, put another way: The costs involved in 'getting it right' pale in comparison to the costs and the hassle of 'getting it wrong' every time.

You are quite right in your reference to nuances. Broad brush approaches do not lend themselves to the kinds of matters under discussion. A seemingly minor or insignificant change in fact pattern can make a big difference in terms of the preferred path to be followed.
 

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Not necessarily - at least in Ontario. Gifts and Inheritance received during a marriage are generally not included into the net family property calculation.
Hence why I used the term "generally". You need to understand and know how to work the system / protect your gifts / inheritance. Considering the OP has not received anything yet he or she has ample time to figure things out.
 

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Normally, AFAIK, in Ont, gifts and inheritances must be kept separate from other property to be excluded from net family property. In the case of the OP, if the father gifts the cottage to his children and said children use the cottage with their families, then the property may indeed be considered Family property, especially with the passage of time and usage. At the very least it becomes a piece in the game in negotiations.
Now if the father adds the children to his principal residence and he continues to live in the home, it would likely be considered separate from family property. And of course the PR exemption is in effect if he remains on title and in the home. ( unless he opts for taking the exemption on the cottage or splitting it)
 

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My challenge is that when it comes down to tax issues or legal issues that impact my/our financial well being, now and in the the future, I do not know what I don't know. Nor might I not have any insight into what potential legislative or tax regulation changes may look like or how they may impact my position.

The few times that I have engaged professional legal or tax advice have each turned out to be well worth the investment. Saved me money, grief, and time. I don't want to end up in a jackpot simply because I was too frugal or too vain to seek out and pay for advice before following what could turn out to be an ill advised course of action.
 

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You are spot on Ian.
I do find input from these forums valuable in formulating questions to ask when I seek professional help.( and in determining the depths of my ignorance sometimes which hastens my consultation with a pro)
If you don't have some idea of what to ask or the breadth of the problem, sometimes the pros miss something because it seems obvious to them.

And of course, there are those people who do what they want to do, in spite of the best advise and warnings. Saw this too many times in my career. In many cases they got away with it but I have seen some cases backfire pretty badly.
 

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Based on the information in the first post ("plenty of yrs left") I personally would not transfer or gift the properties to the adult children. With the limited information provided it would appear to create more problems then it would solve. Something that could be considered 10+ yrs down the road.

Perhaps the OP could expand further on why the family wants to do this now.

From experience, joint ownership in a cottage sucks!

Whether you are seeking advice from a doctor, lawyer, accountant, etc. - not all advice is created equal. Learn as much as you can, get second opinions, etc.
 
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