A tax question I am often asked, especially when thoughts turn to summer activities, whether one’s cottage should be owned by a family trust.
In general terms, what is a family trust?
A trust is the legal relationship created when a person (the settlor) places assets under the control of a person (the trustee) for the benefit of some other person or people (the beneficiaries) for a specified purpose.
What, if any, are possible benefits of using a family trust to own a cottage?
There can be many benefits. Typically, many situations strive to achieve:
i) succession planning involving gifting ownership of a cottage from parents to children while still enabling the parents to use the cottage, and;
ii) facilitating “management” of the cottage (i.e. issues such as access right to the cottage and payment of ongoing cottage expenses), especially where numerous individuals and/or generations are involved.
Other benefits may include:
i) significant tax minimization at death in respect of the existing owner of a cottage since future increases in the value of the cottage will not accrue to the existing owner if a trust is used and;
ii) the possible reduction of probate fees related to the value of the cottage as a result of the death of the existing owner.
What are some of the tax issues to be considered in making this decision?
Depending on the type of trust being considered it may not be possible to transfer an existing cottage to the trust without incurring a tax liability as a result of the transfer. Also, if the trust claims the principal residence exemption (PRE) on a future disposition of the cottage, it may impede the various beneficiaries of the trust who use the cottage from claiming the PRE when their respective individual homes are sold. Land transfer tax issues should be also considered.