Personal Finance

Cottage - How to handle situation?

  • Last Updated:
  • Feb 26th, 2018 6:07 pm
[OP]
Deal Addict
Jan 1, 2007
1156 posts
208 upvotes

Cottage - How to handle situation?

NOTE: Originally in the Real Estate sub group and reposting it here to see if I can get feedback on question 2 and 3 before walking into any financial institution. Looking for feedback to ask the right questions :)

My dad and his brother each owns half of the same cottage on title. His brother wishes to sell his half and from what I understand, my dad has the first right to purchase the other half. We can assume the cottage is probably worth close to $500K, I have no debts, and own my current home. I have so many questions on how to handle this situation.

1/ How does my dad and his brother each get a fair price for the cottage? Should each of them get a different appraiser? How can you trust these appraise values and how do you get to the final agreed price, average of the two? Real estate agents typically would give higher prices, just to get a larger transaction fee. Is the value of the cottage really just based on how much feet of water front?

2/ My dad is nearing retirement and would not purchase his brother's half. I would be the one buying it and in the end, he would want to transfer the his half of the title of the cottage to my name so I would own all of it. So he is going to "gift" me his half of the cottage. How does one handle the tax, if any, implications of this transaction. Gifting be done in lump sum or installments if there are tax advantages? Should the ownership of the cottage be transfer to a corporation?

3/ Since the value of half the cottage is high, I would like to get a mortgage if possible. How difficult would it be to get a mortgage from a bank or any other financial institution? How does the bank value or appraise a cottage property?

What other items should I consider for those who have experience in this situation? Thanks in advance.
11 replies
Sr. Member
Oct 14, 2012
700 posts
437 upvotes
Woodstock
You should really talk to an accountant about the impact of all of these transfers. It's going to be messy.

When your brother sells, whether any money changes hands or not, your brother will have to declare a capital gain on the sale if the value of his half of the cottage has gone up since he originally acquired it, and if he has owned any other residence during the entire time he owned a share of the cottage and if he wants that other residence to be deemed his principal residence because its value has been going up faster. He will need to have a value for the cottage at the time he got it and a value at the time he disposed of his interest in it that the CRA will consider reasonable. Usually that means an independent appraised value or an actual bill of sale number from a third party seller.

If your brother did not have a principal residence during some/all of the time he had ownership in the cottage, it gets even messier because he can deem the cottage his principal residence when he owned no other home. He may need even more "provable" values for the cottage value then. For e.g. say he was a renter for the first 3 years he owned a share in the cottage. Then he could declare any increase in capital value of the cottage from year 1-3 as non-taxable as it was his principal residence, and then any increase in capital value from years 4-8 as a capital gain because it was a secondary asset. He'd need accurate values on day 1, at the end of year 3 and at the end of year 8.

Is the cottage your Dad's principal (only) residence and has it always been so? If not, when he gifts it to you, your DAd has taxes to pay. He will owe capital gains on any increase in value during any intervals it was not his principal residence. If the value of his share of the cottage is high and if his capital gain on the value is high, he may very well lose his OAS (if he receives it normally) for that year due to the OAS clawback for too high an income. They will get back his OAS by a payment calculated when he does his income tax return for the next year. So he will have to pay tax on the "deemed" sale and he will lose some or all of his OAS for one year. It will also be useful to file a form that says his ongoing income is NOT going to continue to be that high, or they will continue to reduce/eliminate his OAS for the next year and they will likely expect him to make quarterly tax installment payments the next year, on the expectation that he is going to continue to have huge capital gains each year.

Talk to an accountant familiar with the transfer of family cottages. It's worth it.

My relative who bought out a family cottage found it easier to do using a HELOC than getting a mortgage so I can't offer any suggestions there. I think the bank wants a lot more down payment than for a city house and will want more info about the age of the septic system (if any) and so on than for a city property.
[OP]
Deal Addict
Jan 1, 2007
1156 posts
208 upvotes
BetCrooks, UrbanPoet, thanks for all the feedback and advice. My dad and his brother (my uncle) have their own principal residence, so no worry about that. The cottage is seasonal (2-3 months in the summer only) and has never been rented out, as far as I know. So if I understand it correctly, if my dad gifted me the cottage and I buy the other half of the cottage, then both dad and uncle will incur some sort of capital gains tax. I am not sure my dad wants the capital gains portion and I wonder if it is easier if he and I now own the cottage. Only uncle would have the capitals gains tax.

Looks like my next step might be to visit a trusted accountant.

I am leaning on using my HELOC on the cottage than going to the bank. Everything I have read on cottage mortgage seems messy and unnecessary.
Newbie
Aug 12, 2017
22 posts
9 upvotes
I can add a couple of points as we had our cottage go through a situation not entirely different from yourself. FYI, I am an acccountant, and this is what I did/would do:

First, addressing the value of the cottage. You might be able to get away with having 3 different real estate agents doing an appraisal. Unless there are significant differences, I would use a average to get the sales value. When we had ours done, we got 2 estimates, $190K and $200K, we used $195K as the FMV. Unless there is something that looks or seems odd, I cannot see the CRA caring provided you have the backup. Ideally, the realtors will state some reason for the value, similar sales, zoning changes (ours had grandfathered features that you cannot add now) etc. I'd have to dig up ours, but it was a page of stuff that everyone seemed to agree on.

Your uncle is an arm's length person dealing with you. Your dad is not. So if you decide to just purchase your uncles part, the above applies without thought. In addition, if your uncle wants to spread out the capital gains over the next couple of years and does not need the money immediately, he could take a capital gains reserve for up to 5 years. So a $100,000 gain would come into income at $20K for each year. If you do this process, I would suggest talking to an accountant. This would also help minimize any OAS clawback if that is a concern.

For your dad, same applies, although dealing at non-arm's length so there is some added complexity. The CRA would be much more interested in that case that the sales price is the true FMV. I see no reason why you could not do the same thing....he taking a capital gains reserve over 5 years. If you came in to me, I'd want some more details, ie. what is the cost basis etc.

When we got the cottage - a HELOC was advised and used. YMMV.
Deal Addict
User avatar
Jul 29, 2013
1396 posts
1031 upvotes
Would it be possible to use the capital gains reserve idea to spread out the inclusion over 5 years if selling on the open market i.e. not to a family member. Are you at risk of not getting full payment and possible court costs. Is there a down side besides spreading out the payment over 5 years.

I can not see passing on the cottage as one son lives too far away to enjoy it and the other probably can not afford the upkeep.
Deal Addict
Feb 25, 2007
1325 posts
786 upvotes
Ottawa
On valuation of the cottage - depends a bit on the goal of the valuation. If the main goal is to get a reasonable ballpark figure and have paper trail for the CRA, one reasonably justified valuation, in writing, from an experienced local real estate agent or appraiser is good enough. If the goal is to reconcile wildly different "intuitions" of different family members (say one saying "but look how special the land/view/water access are" and another saying "but the cottage itself is decrepit"), you may need to get several appraisals, enough to get whoever turns out to have been unreasonable to accept the facts. If you will be getting a mortgage/HELOC *secured against the cottage itself*, the lender will likely want to do an appraisal themselves. Especially if they will charge you for that, you should be able to negotiate that they will share the output of that appraisal with you.

Re financing. If you are in a highly desirable cottage area, things can be a bit different (better), but by and large, it's a lot easier to get financing on a winterized or at least winter-accessible cottage than a hard-to-get-to, summer only one. Basically the operative thing is do cottages like yours generally sell like hotcakes (then financing will be available) or do they moulder on the market for months or years (then not). If you have built up equity in your principal residence, you'll generally find it's much easier and cheaper to borrow against your house to finance your cottage purchase than borrow against the cottage.

Vendor-take-back financing (for arm's length purchases) is not unusual for sales of severed land exactly because of the capital gains reserve. We're looking for vacant waterfront land now, and it's both a blessing and a curse. The interest rate the vendors seek to get may not be unreasonable compared to (with difficulty) mortgaging the land/eventual build itself, but is higher than good financing on an urban principal residence. So vendors like to present it as a benefit for the purchaser, while -- at least at the terms they expect -- it's more a benefit for the vendor. Everything is negotiable, of course, but adds to the noise. I'm not sure, but I think VTB is less frequent for cottage sales since more often the vendor needs the money quickly to put into another property.
Deal Guru
User avatar
Nov 18, 2005
11370 posts
2833 upvotes
Kingston
Thecottager wrote: I can add a couple of points as we had our cottage go through a situation not entirely different from yourself. FYI, I am an acccountant, and this is what I did/would do:

First, addressing the value of the cottage. You might be able to get away with having 3 different real estate agents doing an appraisal. Unless there are significant differences, I would use a average to get the sales value. When we had ours done, we got 2 estimates, $190K and $200K, we used $195K as the FMV. Unless there is something that looks or seems odd, I cannot see the CRA caring provided you have the backup. Ideally, the realtors will state some reason for the value, similar sales, zoning changes (ours had grandfathered features that you cannot add now) etc. I'd have to dig up ours, but it was a page of stuff that everyone seemed to agree on.

Your uncle is an arm's length person dealing with you. Your dad is not. So if you decide to just purchase your uncles part, the above applies without thought. In addition, if your uncle wants to spread out the capital gains over the next couple of years and does not need the money immediately, he could take a capital gains reserve for up to 5 years. So a $100,000 gain would come into income at $20K for each year. If you do this process, I would suggest talking to an accountant. This would also help minimize any OAS clawback if that is a concern.

For your dad, same applies, although dealing at non-arm's length so there is some added complexity. The CRA would be much more interested in that case that the sales price is the true FMV. I see no reason why you could not do the same thing....he taking a capital gains reserve over 5 years. If you came in to me, I'd want some more details, ie. what is the cost basis etc.

When we got the cottage - a HELOC was advised and used. YMMV.
I've also been there done that.

+1 on the suggestion of getting multiple appraisels and averaging them. The appraisals should include backup to give everyone confidence that they are reasonable.

Regarding the transfer from the father, can this not be done at the father's original cost (because it is to a direct family member) and avoid any capital gains taxes for the father at this time. They son would have a lower cost base and therefore higher future taxes when he sold. Or is this only possible between spouses?
[OP]
Deal Addict
Jan 1, 2007
1156 posts
208 upvotes
Thanks everyone for all the responses! It has helped me tremendously and I hope it has helped others as well. My dad is 7 years from retirement and my uncle is probably closer to 12 years from retirement. Does that affect the OAS items since they are still a few years out?

Professional appraiser and real estate agent are two different entities correct? They seem to be used interchangeably in this discussion. Professional appraisers has no vested interest in the outcome of the appraisal and should render services with independence, objectivity and impartiality - no matter who the appraisal is prepared for? This would be what is need for a cottage mortgage, although at this time I am planning to partially use my home HELOC on the 250K. My guess is the professional appraiser may appraise the cottage at a lower price than what a real estate agent may list the cottage at on the open market.

Yes my dad would want to know the answer to this question below! Gifting his half of the cottage to me would be expensive for him lol.
JWL wrote: Regarding the transfer from the father, can this not be done at the father's original cost (because it is to a direct family member) and avoid any capital gains taxes for the father at this time. The son would have a lower cost base and therefore higher future taxes when he sold. Or is this only possible between spouses?
Newbie
Aug 12, 2017
22 posts
9 upvotes
FYI, sorry I am still relatively new to posting here, I'm not sure how to quote text.
enqmsf - I'll refer to houska: a professional appraisal should be done if there is some question of the value of the land between siblings/family members, or if you foresee any potential legal issues going forward. This would likely hold up if questioned in court
When I mentioned realtor appraisal's, I was thinking of what he mentioned with the CRA - to prove a reasonable paper trail and to address any of their concerns, this should be adequate. This is the cheaper option, in our case, the one brother selected one realtor, we picked another and the third brother said 'I don't care'. Although in my opinion, the lower the price of a place, the odds are the two values will be likely closer. If the cottage was on an island in Muskoka, and over a million, I could see a large difference in the values.

I believe it is only between spouses that you can transfer an asset at cost, shifting the future capital gains to the transferee. It would not apply in your situation, sorry.

Regarding vendor financing to get the benefit of spreading the gain over five years and the interest rate to be used. I see no reason that you could not say Bank of Canada Prime, plus 2% or something like that. Since you are dealing with 'family', the arguments about what interest rate to use is probably not as big a deal as dealing with a third party. Please note: your uncle/dad should include this interest income in his income during the year (on schedule 4) but you could bump up the cost basis of the property for any interest you pay. So in 2018, you incur $4K in interest, uncle would include this on line 121. But you could bump of the cost of the cottage from say $500K to now $504K.

I would strongly suggest talking to an accountant if you plan to do this. That being said, I think everything people have suggested can be done with a little planning.
[OP]
Deal Addict
Jan 1, 2007
1156 posts
208 upvotes
Hey Thecottager, you certainly have the proper name for this subject :) Thanks for sharing your experience on the subject as many of the posts have helped me much more on the subject. We are just at the "uncle wants to sell", and not even quite at the price discovery stage yet and I will have some followup questions for everyone when that comes.

I believe then next stage is go through with professional appraisers, perhaps have 2 of them done, one on each side of the family. Does anyone know ballpark how much they may cost? What about the cost of the accountant and lawyer be?

Top