It’s safe to say that summer is on its way. As you decide on how—and where—you’ll be spending the weeks ahead, don’t forget about a Canadian icon: the cottage.
Whether you call it the cottage, the summer house, or simply going to the lake, this is your time to enjoy the beauty Canada has to offer.
A report by RE/MAX found that nearly 70% of Canadians would choose to spend their time at a cottage over a big city vacation. It’s the perfect escape at any stage in your life, but you will need to think about how cottage ownership fits into your wealth management plan.
A Second Property as An Investment
Owning a cottage can be the perfect getaway for you and the family, but it can also have great potential as an investment! Even if you aren’t able to make it to the cottage each weekend, it doesn’t have to sit empty. Renting it out is a great way of recouping some of the costs of ownership while building equity.
Purchasing A Cottage
The purchase of a second property is treated differently than a primary residence and falls subject to different rules. You’ll need to have at least 25% as a down payment. Taking on a mortgage can influence other parts of your investment plan, so you’ll want to consider this before making an offer.
If a mortgage is required for financing your second property, remember the 32 percent guideline. Commonly used to check for mortgage approval, this calculation will take all properties you own into account. The combination of mortgages, property taxes, and utilities should not exceed 32% of your gross household income.
Second home ownership is a complex topic and subject to numerous nuances when it comes to taxes, so good advice is required. Set up an appointment with a professional tax consultant to help you understand tax rules and restrictions surrounding your second property.
Planning for Tax
The principal residence exemption (PRE) applies to any property you designate as your principal residence, meaning the CRA will allow you to shelter any gains earned on the sale of this property. This means you can claim your cottage as your principal residence, even if you only spend a portion of your time living there.
Keep in mind that if the main purpose for your cottage is to make income, you may not be able to exempt this profit from capital gains tax. It’s best to speak with a tax specialist that can help you figure out what is the most advantageous way to deal with your properties to maximize your exemption and minimize the amount of tax owed.
Other Costs to Consider
Beyond the purchase costs, consider the maintenance required for property upkeep. Keep track of what you spend on the property to get a firm idea of exactly what your cottage costs you.
Owning a cottage means you now have multiple properties to take care of. This includes caring for the grounds during each season. After all, your cottage should be a space of rest. You won’t want to make the trip just to head up there and work!
You should also set aside an emergency fund for your cottage. With unpredictable winters and spring floods, your cottage may need unexpected care from leaks or burst pipes.
You’ll also want to consider how a second property—and the associated costs—will fit into your financial plan. This is where the services of an investment counsellor can prove invaluable. They can evaluate your full portfolio and offer insights about what benefits you can expect.
Estate Planning with A Cottage
Whether you own a property already or are looking to close the deal, you’ll need to think ahead towards how your cottage fits into the plans for your estate.
Transitioning a cottage will depend on your circumstances and preferences when it comes to family and tax issues.
Selling your cottage to a beneficiary
One such option is to sell the vacation home to the intended beneficiary, such as a child or other family member, with a private mortgage. This can be forgiven in your will.
Keep in mind that a sale is subject to a capital gain or loss, based on the fair market value of your cottage. The price you set for your home doesn’t matter, so be sure that your beneficiary is aware that these taxes could apply.
If you do choose to sell your cottage now, you do lose ownership control. Consider drafting an agreement for lifetime interest.
Transfer by will
You can also make your cottage part of your will and make it a gift to one or more beneficiaries. Or, allow a beneficiary the option of purchasing the cottage. A will is a great option as it allows you to include provisions or allowances as you see fit.
Transfer by trust
Make it a communal inheritance by placing the cottage into trust for all of your children. Your beneficiaries can then hold onto it communally, one family member may offer to buy out the others, or the trust can sell the property and distribute the proceeds.
You’ll need a stipulation that the entire family uses it and pays for upkeep to keep things fair. This keeps everyone in agreement. This way, your family can focus on spending quality time at the cottage.
A cottage is more than just a property. It is a retreat, an escape, and a sanctuary.
