The Now Newspaper “Best of Your Neighborhood Award 2013″: http://issuu.com/surrey-now/docs/srysthu20140130
The Now Newspaper “Best of Your Neighborhood Award 2013″: http://issuu.com/surrey-now/docs/srysthu20140130
“Your retirement should be enjoyed because you’ve earned it”
I think that being eccentric would be fun. I don’t mean eccentric in a use-your-tea-bag-then-dry-it-out-and-use-it-again sort of way, but in a do-something-crazy-to-help-other-people sort of way. Take Luis Carlos de Noronha Cabral da Camara, for example. This Portuguese aristocrat had no family and few friends, so he left his estate upon his death a few years ago to 70 complete strangers that he randomly selected from the Lisbon phone directory. Most of them thought it was a scam – until they received their cheques.
I’ve been writing about the five D’s of estate planning: define, design, document, discuss and distribute. Today, I want to finish things off by talking about distributing your estate.
At the most basic level, you can distribute your estate either during your lifetime, or after your death. People who make distributions on or after death usually do so because they aren’t sure how much they’re going to need, and don’t want to run out of money. This is a perfectly legitimate concern.
I would say, however, that you should do the math to determine approximately how much you’re likely to need to look after yourself for the rest of your life. If you can’t do the math, ask an accountant or financial planner to help.
Many people who have more than they’ll need choose to give some away today – to family, friends and/or charity, because they want to see the gift enjoyed. If you’re transferring money to your heirs today, decide whether the amounts will be considered an advance on their inheritance, or gifts over and above what they’ll receive upon your death. If the amounts are an advance, be sure to document these advances, advise your executor where to find that documentation, and clarify in your will that advances will reduce the amount that each heir will otherwise receive.
To the extent your estate is going to be distributed after your death, there are six key ways this can happen:
1. Through intestacy laws. If you die without a will, these provincial laws will dictate who gets what. This could create more tax and other costs than necessary. This is a default approach to distributing your estate, but it’s not a plan.
2. By naming beneficiaries. You should name beneficiaries on your life insurance policies, pension plans, RRSPs, RRIFs and TFSAs.
3. By owning assets jointly. If you own an asset jointly with right of survivorship, the asset will become the property of the other joint owner(s) if you predecease them.
4. By way of trusts. You can leave assets to others who are beneficiaries of a trust you might set up during your lifetime (called an “inter-vivos trust”) or upon death (called a “testamentary trust”). Trusts are valuable if a beneficiary is unable to manage an inheritance on his or her own, or if you want to add a measure of asset protection to help your heirs.
5. Through a partnership or shareholder agreement. If you’re party to one of these agreements, your interest in that partnership or corporation could be distributed in accordance with the agreement.
6. By your will. Even if you plan to distribute your estate using one or more of the other methods, you should still have a will to deal with any other assets or belongings you might own at the time of your death.
When preparing a will, many people take the view that “fair isn’t always equal”; there can be valid reasons to leave different amounts to different heirs. I do encourage you, however, to avoid a situation where you completely leave a child out of your will altogether. I realize that there can be exceptional circumstances and there is no one-size-fits-all approach here. However, most people who leave a child out of a will do so because of a strained relationship.
There’s no better time than today to mend broken relationships. And if that isn’t going to happen, it could be a healing gesture to remember that child in your will in a meaningful way. It can send one last message that you really do care, despite the issues between you.
On the flip side, leaving that child out of your will sends exactly the opposite message – a message that you don’t care, or that you can’t forgive. That message, unfortunately, will live with that child forever. You can’t change it after you’re gone.
The emotional scars this can create for not only the child, but other family members, isn’t worth it. Swallow your pride. If you can’t reconcile during your lifetime, at least make a positive and meaningful gesture upon your death.
Article: Globe and Mail
My wife, Carolyn, and I revised our wills recently. The hardest decision was around the guardian of our kids. “Tim, I just want someone who is loving, caring and a good role model to look after our kids if we’re gone.”
“Carolyn,” I replied, “if we knew someone like that, why wouldn’t we just give the kids away today?” Well, we decided to keep the kids. And then we sat down with them to talk about who will look after them if we’re gone. We’re starting to share our estate plan with them.
What have you shared with your heirs about your estate plan? Over the past two weeks I’ve introduced a framework for thinking about that plan. Specifically, I introduced the five “Ds” of estate planning: Define, design, document, discuss and distribute. Today, let’s talk about discussing your plan with your heirs.
Some people won’t initiate a conversation with their heirs because they don’t want the heirs knowing how much they stand to inherit for fear of fostering a sense of entitlement, or causing the kids to change their own career plans or become less productive.
Kids and other heirs often won’t initiate the conversation because they don’t want to seem greedy or curious about what they might receive one day. And the kids have a point: If they do start the conversation, many parents will think precisely those thoughts. Here’s a message to everyone involved: Get over it. There are some very important reasons why a conversation about your estate planning is necessary.
Having a conversation about your plan will demonstrate that you’ve given thought to your own financial well-being. It can also prevent confusion – and even legal battles – after you’re gone. Setting up your heirs to live in harmony with each other and with the decisions you’ve made often depends on having a discussion while you’re still alive. I’ve seen more than one case where hard feelings – and even psychological damage – have resulted because parents took an approach to their planning that some surviving family members couldn’t understand. And let’s not forget that sharing your plan with your heirs can often result in some tweaks to the plan that could make it even better.
I can hear some comments already: “There’s no way my heirs are ready or equipped to hear about my planning.” If this is your thinking, barring some incapacity an heir may have, the real issue should not be whether you speak to them, but when you speak to them, and what you share. Perhaps some education or counselling from a trusted adviser today can prepare them to eventually hear your plans.
Here are some guidelines for having a conversation with your heirs:
Choose the right time. If it’s tough to schedule a formal time for a discussion, have a conversation more casually when you happen to be together, taking a walk or over dinner, for example. You might unveil your plan in stages. We’ve talked to our kids about guardians, but not about dollars yet, given that they’re still in their early teens.
Decide whether together or separately. You could speak to your heirs at the same time, or in separate discussions. In some cases, separate discussions may be best if there are sensitive issues to discuss (perhaps you’re leaving unequal amounts to each child, for example).
Take a team approach. If you have a spouse, you should conduct the discussion together in most cases. Make sure you’re in agreement as to how things will work when you’re each gone, and be of one mind when speaking to the kids.
Agree on what you’ll share. My view is that, in most cases, your heirs should eventually understand the complete plan, including how much they will inherit. How much you share should depend on the maturity of your heirs, and their stage of life. A word of caution: Many people conclude that their heirs are never ready to hear the complete plan. Only in rare cases is this the case. By the way, simply giving a copy of your will to your heirs is not the same as having a discussion about your planning.
Explain why. Make sure you share with your heirs the principles that guided your decisions when preparing your estate plan. If they understand why you’ve created the plan you have, there’s a lower potential for hurt, harm and misunderstandings after you’re gone.
Ask for feedback. Ask each heir individually how they feel about the plan. You may not change your mind on issues of concern, but it will let them know they’ve been heard, and you’ll have had a chance to explain your thinking.
Article: Globe and Mail
When my great-uncle Kerry died, there was some confusion when his last will and testament was read. He had managed to divide his estate into 10 parts, leaving two parts to a friend, two parts to another, and five parts to family – making just nine parts. We all had a chuckle, because he was a mathematician by profession.
Uncle Kerry did, however, do a great job at documenting his entire plan, as did my grandfather. My grandfather’s will was just one part of his documented plan. In his will, he did write: “I wish peace and affluence to all of my loved ones, and a piece of effluence to all of my enemies.”
Last week, I introduced the five “Ds” of estate planning: Define, design, document, discuss and distribute. I had focused on the first two of these elements of a good estate plan. Today, I want to talk about documenting your plan.
Documenting your estate plan is important for a few reasons. First, it will help to ensure that you’re clear on what should happen when you’re gone. Second, it will vastly improve the likelihood that your wishes are actually carried out. Third, without certain documentation, it’s possible that the government could step in and dictate what should happen upon your death. Finally, documentation is largely about making life much easier for your executor and heirs. If you’re like most people, you likely have personal and financial information in several different places. Who’s going to pull all of that together after you’re gone?
So, what type of documentation should you prepare and maintain? I’m going to put these documents into three buckets: (1) your last will and testament, (2) your powers of attorney, and (3) other information.
As for your will, my first piece of advice – as crazy as it might seem – is to have one. I’ve met many very successful individuals who don’t have a will. Without a will, the intestacy laws of your province will determine who gets what. This typically results in much higher costs to administer your estate, and more in taxes on death than necessary. Next, be sure to visit a lawyer specializing in estate law to help in preparing your will. My article from last week should help in drafting your will if you’ve answered the numerous questions I posed. I’ve written in the past in more detail on wills.
Your powers of attorney may look different, and go by different names, depending on your province. Still, these documents should provide another person with the ability to make decisions over your financial affairs and personal care in the event you’re unable to do so. These documents are effective while you’re still alive but can’t look after yourself (once you’ve died, your will becomes the key document governing your affairs). Again, look for an experienced lawyer to assist in preparing these documents.
Now, what about the “other information” I mentioned? I suggest that you document the following information and update it once a year, or as needed:
Personal information: This includes your legal name, current address, place of birth, citizenship, social insurance number, occupation, all e-mail addresses, phone numbers, and similar information.
Family and dependants: List the legal names, addresses, dates of birth, citizenship and contact information for each of your immediate family members, including your spouse, and dependants.
Professional and health care advisers: Document the names, addresses, and occupations of each of your professional advisers, including your doctors and dentist.
Assets and liabilities: List all your assets, including bank, investment, RRSP, RRIF, TFSA, pension plan or similar accounts (include account numbers, financial institution names, and beneficiaries already named on any plan documents). List your real estate (locations, location of deeds, and market values), and all other assets (locations and market values). Don’t forget to include business information if you own a business. As for liabilities, include the name of the lender, account numbers, and the amounts owing (think of credit cards, lines of credit, mortgages, promissory notes, student loans, unpaid taxes, and other debts).
Insurance: List all of your life and property insurance policies (include the insurance company, policy numbers, your advisers’ names, and the amount of any cash values or death benefits).
Gifts made: Track gifts already given if those gifts are to be an advance on an heir’s inheritance (some gifts are made over and above what the inheritance upon death will be; some are advances).
Article: Globe and Mail
There is no better time than the summer to sit back, relax and reflect. Reflect on what is likely to take place when you’re no longer here. I know if I’m no longer around there will likely be a big celebration, followed by immense disappointment when my kids realize that my scratch’n’sniff stamp collection and fishing-reel toilet paper holder are being left to our neighbour.
When you’re no longer here, who should inherit your assets? How much is enough for them? Will your heirs know where to find your personal and financial information? What about funeral arrangements? The answers to these questions, and more, collectively make up your estate plan. So, take some time this summer to get your estate plan in order.
To help out, I want to share a framework for thinking about that plan. These are the five “Ds” of estate planning: Define, design, document, discuss and distribute. I want to give credit to author Sandra Foster for her thinking around this. I have adapted the five Ds from her Estate Planning Workbook published a number of years ago. Today, let’s talk about the first two Ds.
The first step in the estate planning process is to define who in your life will receive something from you, and how much they’ll receive.
There’s also the question of when they should receive it – during your lifetime or on death? Jot down your responses to the following questions as you define who, how much and when: Do you want to enjoy your money while you’re alive? Do you feel an obligation to help your heirs? Do you want your spouse to inherit everything if she survives you? Should your kids benefit equally from your estate? Are there specific assets that specific children should receive? Are you concerned about leaving your heirs too much?
More questions in this first essential step: Do you want to donate organs upon death? If you have children from a previous marriage, do you want to keep an inheritance for them separate in your plans? At what age do you want your heirs to have control over their inheritance? Do you want to make gifts to charities? Do you have debts that will have to be paid off before your heirs get anything? If you own a business, have you considered the appropriate transition of management and ownership?
Many parents have the view that they want to leave their kids enough to create opportunities for them, but not so much that the kids can choose to do nothing. The approach I like, if you’re concerned about leaving the kids too much, is to define: 1) specific assets you might want to leave each child; 2) how much to leave the kids to help them with emergencies, and; 3) how much you’d like to supplement their income and for how long.
The second step in the process should be to design what strategies, tactics and tools you’ll use to bring about the transfer of your estate to your heirs. This needs to start with understanding your objectives. I won’t pretend to know your specific objectives, but some common ones include: 1) minimize tax at the time of death; 2) provide for proper management of your assets after you’re gone; 3) watch the kids enjoy some of their inheritance today; 4) ensure children who are minors will be looked after; 5) ensure kids from a first marriage receive an appropriate share of the estate; 6) help your surviving spouse maintain her standard of living; 7) help your favourite charities, and; 8) maintain harmony in the family after you’re gone.
When designing the specific strategies, tactics and tools you’ll use to accomplish your objectives, you might find that some objectives are in conflict, and you may need to prioritize them. For example, wanting to see your kids enjoy some of their inheritance today, and ensuring that your spouse maintains her standard of living after you’re gone, could be in conflict.
Some of the tools that you may find helpful in accomplishing your objectives include: Trusts to hold assets for minors until they reach a certain age; using the principal residence or lifetime capital gains exemptions to shelter gains on a home, cottage, or private company shares; a spousal trust to provide for your spouse after you’re gone but ensure the assets go to your kids after your spouse’s death; life insurance to provide cash to give to charity, fund a tax bill, or top up an inheritance so everyone is treated equally.
There are many more ideas we can, and will, talk about. I’ll continue this discussion of the five Ds next time.
Article: Globe and Mail
It was 85 years ago next month that my grandfather came to Canada from Europe. It was a tough time to arrive here, in 1929, at the start of the Great Depression. I remember him telling me that it became almost impossible to immigrate to North America shortly after he arrived. He said that, if you wanted to get into the United States, you had to have legal documentation or a 95-mile-an-hour fastball.
Today, Canada is a cultural mosaic, with people from all over the world now calling this country home. Just take a look at the multitude of flags flying high during the World Cup taking place over the next few weeks. Today, I want to share a tax checklist of things to consider when immigrating to Canada.
Start making Canadian tax filings. Canada taxes people if they are residents here. You’ll face tax on all of your income, including income from outside Canada. If you earn passive (investment) income inside a foreign corporation that you control, you may have to report that income on your Canadian personal tax return, and you’ll have to file Form T1134 in addition to your Canadian tax return. The penalties can be steep if you fail to report this income, called FAPI (Foreign Accrual Property Income).
You’ll also need to report, using Form T1135, the existence of your foreign assets (except personal use property) if your total cost exceeds $100,000 at any time during a year. Property received from foreign trusts and the ownership of foreign subsidiaries must also be reported each year to the Canada Revenue Agency (CRA).
Obtain a social insurance number. You’ll need to request this key document. It will be your account number for any personal tax filings you’ll have to make. You’ll also need a SIN to receive government benefits, arrange for certain banking services and work for an employer in Canada. If you carry on a business in Canada, you’ll need a business number and may need a GST/HST number as well. Contact the CRA to obtain these numbers.
Track your Canadian cost base. When coming to Canada you’ll be deemed to have acquired any of your capital property – that is, assets – at fair market value immediately before becoming a resident here. The result? Your adjusted cost base for Canadian tax purposes will equal the fair market value of those assets at the time of your arrival. So, you’ll only face tax on gains (and you can only claim losses) accruing and realized after taking up residency in Canada.
Check the status of your non-Canadian trusts. If you’re the settlor of (that is, you transferred property to) a non-Canadian trust, or you’re the beneficiary of one, be sure to visit a tax pro to determine whether the trust will now be considered resident, and therefore taxable, in Canada. You might even be liable for the tax of the trust personally. Sorry about that.
Consider the status of your non-Canadian corporations. If you control one or more foreign corporations, it’s possible that they may now be resident in Canada for tax purposes because the “mind and management” of the companies may now be here. If this is the case, the corporations may be required to file Canadian tax returns and pay tax here. There may be relief available under a tax treaty with Canada to avoid double-taxation in this case.
Be aware of withholding tax requirements. If you move to Canada and continue to make payments of passive income such as rent, royalties or certain interest to non-residents of Canada, there may be a requirement to withhold tax from these payments and remit the tax to the CRA. This requirement can exist even if the payments are made from a foreign bank account.
Understand that immigration trusts have changed. It used to be that, before arriving in Canada, you should have considered creating an offshore “immigration trust” to own certain of your assets for the first five years of Canadian residence. The trust would have avoided Canadian tax on any foreign income earned on those assets for that five-year period. Think of this as a tax holiday, if you will. Well, I hate to be the bearer of bad news, but the 2014 Canadian federal budget did away with this tax holiday.
Apply for other important cards. Finally, you’ll want to obtain a permanent resident card as official proof of your residence status in Canada and a provincial health card to obtain health benefit.
Article: Globe and Mail
Many parents want to leave as much cash and property as they can to their children. However, there are tax, probate and inheritance traps that can cause missteps.
The most common mistakes, which are often accidental and stem from a lack of knowledge, result in inheritance conflicts, the payment of additional income taxes and most importantly, prevent parents from achieving their goal of maximizing their family’s wealth.
Houses and cottages
To save on probate fees or to deal with inheritance issues, parents sometimes decide to transfer 50 per cent ownership of their home to one or more of their children. For income tax purposes, these transfers are equivalent to a partial sale. If the house is the parents’ principal residence (or “PR”), there are no tax consequences to the parents (assuming their cottage is not their PR). However, if the child has a PR of their own, they will likely be taxed on 50 per cent of any future appreciation of the parents’ home.
As a rule of thumb, parents should not transfer their homes to their children, since the net result is almost always the conversion of a tax-free gain on their PR into a taxable gain in the hands of the children, leading to less overall family wealth.
In most cases, a better tax strategy is for parents to keep the house in their name until they die.
If you own a cottage, the same “phantom sale” results if you transfer it to one of your children. In some cases this is a misstep, which results in a pre-payment of tax.
In other cases, the transfer of a cottage is part of effective tax planning. The idea is that you pay taxes now on the “sale,” so that future growth in the cottage value accrues to the child instead of you. Rather than transfer the cottage ownership, some parents obtain life insurance to cover the resulting income tax liability upon their death. However, the cost of the insurance may ultimately reduce the family’s wealth, so it is important to weigh these options carefully.
As parents age, it is common for one of them to change their bank account (or brokerage account) to a joint account with one of their children (called joint tenancy), to avoid getting hit with probate fees. Despite creating a joint account, these parents often continue to report the income from the bank account on their own tax return. In essence, they just want to avoid probate fees and not actually transfer half the bank account to their child.
This is a common misstep, since Canada Revenue Agency has said that when someone just changes the name on a bank account, yet still has beneficial ownership of the bank account, there is no true joint tenancy and the transfer will fail to reduce probate fees.
So unless you transfer true ownership of the bank account – one indication of this may be your child reports half the income on their return, you have not minimized your probate fees or maximized your family wealth.
Another danger for larger families is that by listing just one child as a joint tenant on the bank account, the child may consider the account theirs and not their siblings, which can lead to estate litigation. Documentation of intention for the account is a must.
When considering changing an account to joint, parents should consider full disclosure to all their children about their intentions and how the account should be reported for tax purposes.
Jewellery, antiques and art
A significant misstep that can come back to haunt children is when parents “pretend” they don’t own expensive personal items such as jewellery, antiques and art. Some parents ignore these items purposely in their wills and rely on an understanding with their family that these items will “walk out the door” without being reported for income tax or probate purposes. As a parent you must understand that if you name any of your children as executors of your estate, you are asking them to evade income taxes and the law.
A simple way to avoid this misstep is to buy antiques, jewellery and art in your child’s name originally, so that any appreciation in value belongs to them.
Too many people are ill-informed when it comes to taxes, probate fees and estate law. They end up making serious blunders that inadvertently reduce their family wealth. If you are looking for ways to pass your wealth to your children, do some research and obtain professional advice before changing the ownership of your most valuable assets.
Article: Globe and Mail
Cottage life can be dangerous. I recall reading about a moose hunter who, last October, missed his target and hit a cottage in the distance, wounding a man in his seventies as he answered nature’s call.
The lesson to be learned here? Endangerment at the cottage can start anywhere – even in the bathroom.
Another risky location can be the dinner table – usually when talking about the future of the cottage. Last week I introduced questions you should be asking at the dinner table to figure out who, if anyone, in the family would be good candidates to inherit the cottage. Once you’ve determined that the cottage should stay in the family, you need to think about the timing of a transfer, and how that transfer will take place.
Today, let’s focus on timing. When should you transfer the cottage to your heirs – during your lifetime, or upon your death? Here are the things to consider when making that decision.
1. Tax issues: Transferring the cottage today, rather than at death, can pass the future growth of the cottage to your heirs, allowing you to avoid tax on that growth at the time of your death. This works best if the transfer can take place with little or no tax cost today (if the property has not appreciated in value much, for example). Keep in mind, a transfer to someone other than your spouse is treated as a taxable disposition. Finally, think about whether you’re willing and able to use the principal residence exemption to shelter a transfer of the cottage from tax. If so, tax issues won’t likely drive your decision to make the transfer today or on death; other factors may be more important – so read on.
2. Practical issues: Transferring the cottage to the kids during your lifetime can allow you to see, firsthand, how they can manage sharing the property. You can provide guidance along the way if necessary – setting them up for success when you’re gone. Giving them ownership can also encourage them to be more involved in the maintenance and upkeep since ownership comes with responsibility for these things. What about your own desire to continue to use the property? If you don’t care to use it much any more, it becomes easier to transfer ownership today.
3. Emotional issues: Some people want to be around to see their kids enjoy ownership of the cottage, making a transfer today a good idea. This can also encourage use of the property for bringing the family together to create great bonds and memories – sometimes even more than if you had continued to own the property and the kids worried about impinging on your time there.
4. Asset protection: Some family members may be more susceptible to legal battles than others. Business owners are often at higher risk of lawsuits or claims by creditors. It often makes more sense to keep assets in the hands of those who face lower risks of these claims. This might affect your decision about whether to keep the cottage in your name or transfer ownership to a child. If you do transfer the cottage today, consider taking back a mortgage on the property to give you control over the property in the event a creditor or the ex-spouse of a child tries to make a claim.
5. Retirement planning: Do you need to sell the cottage to raise money for retirement? If so, then a sale during your lifetime could be important. If the kids are willing and able to buy the property, then it’s a straightforward decision to decide to transfer ownership today. Consider a vendor-take-back mortgage where you provide the financing your kids need and they make payments to you monthly. This could provide you with cash flow in retirement.
6. Maintaining control: Transferring the cottage today doesn’t have to mean giving up control. You could, for example, transfer the property to a trust where you are trustee (speak to a tax professional about the 21-year rule and principal residence issues), or you can enter into an agreement with the kids that can govern issues such as the terms under which the property can be sold or mortgaged, and use of the property.
Article: Globe and Mail
You’ve probably heard the story about the young man whose father was very ill, with only a few days to live. The young man approached the woman of his dreams and told her that his father was ill, and that in just a few days he would inherit vacation properties worth millions.
To his delight, the woman paid a visit to the young man the next day. The problem? She announced that she was now his stepmother.
Okay, I don’t know that the story is actually true, but it raises a good question: Who is going to inherit your vacation property? Specifically, let’s talk about the cottage. I’m going to assume for a minute that you may want one or more of your kids to eventually inherit the property.
Consider spending time at the cottage in the next few weeks with the kids, and have an open discussion using the following questions as a guide to understanding how your kids feel about the place.
Using the cottage
Who intends to live near enough to make regular use of the cottage?
As a practical matter, which of your kids have the ability to use the cottage, and who lives far enough away that they may only use it briefly each year?
Who would like to use the cottage and how often?
Even though a child may live close by, does he want to use the cottage? Maybe it’s not his thing. Or perhaps he only cares to be there one or two weekends each year. Gain some clarity around this.
How will the kids using the cottage split their time there?
Now that you know who is willing and able to use the cottage, and how often, how will the kids split their time once you’ve passed ownership to them? How will they make this decision each year? If you pass ownership to them during your lifetime, how much time would you like to spend there? Be clear about this.
If one or more kids are unlikely to use the cottage, some parents will consider leaving those children other assets instead. It could be a recipe for disaster if the children who rarely or never use the cottage still have ownership in the property. It can still work if everyone is in agreement on how costs will be shared and decisions will be made, but when one or more kids are rarely at the cottage, and aren’t contributing equally to its maintenance, emotions can run high.
If you’re not able or willing to equalize the estate by giving the non-users of the cottage other assets, consider granting the non-users certain rights if the child who inherits the cottage sells the property following your death. Perhaps the non-user children should be given a right of first refusal to buy the place, and a right to share in the sale proceeds if they don’t buy it themselves.
If none of your children are interested or able to use the cottage, you might consider selling the property before your death. This will simplify things for your executor.
Maintaining the cottage
Who will pay for routine upkeep?
Upkeep can be expensive. Costs include repairs and maintenance, property taxes, insurance, and utilities. There might also be larger capital improvements or expenditures that are required from time to time. Some parents who have the means will consider leaving some money in trust to fund some of these costs if one or more kids might struggle with their share of these. If a child chooses not to pay their share, should penalties apply? What will that look like?
How will decisions be made about what to repair and when?
I know my kids will have disagreements over what should be fixed at the cottage, and when. How will they decide? Perhaps an annual budget should be agreed upon and used as necessary for repairs and maintenance.
How will major decisions be made?
Two of the most important decisions include whether and when to sell the cottage, and when to make major capital improvements. If the cottage is sold, how will the sale proceeds be shared? As touched on above, it’s common for kids to have the right of first refusal to buy the cottage before a sale to a third party.
How will disagreements be resolved?
Be realistic and recognize that there will be disagreements. How will the kids resolve these? Will the majority rule? Let the kids figure this out in advance of any disagreements.
Finally, it’s a good idea to document the answers to these questions so that everyone is on the same page.
Article: Globe and Mail
Last weekend my wife, Carolyn, was out in the yard planting new gardens. Our youngest son was with her, digging a hole in the corner of the yard that was a foot wide and about three feet deep. “Dad, did you know that if you dig deep enough you’ll reach the centre of the Earth – and it’s really hot there.”
“Is that what you’re doing?” I asked.
“Dad, c’mon, don’t you know that the Soviets tried that already, a long time ago. They dug a hole 12 kilometres deep and hit lava. They had to stop. I’m just digging a hole to burry Chester, then I’m going to plant a tree over the spot so we remember him.”
Chester is our hamster, who died a few days ago (Chester is also the name of a family friend – whom we did not bury – just to clarify). With all the landscaping going on at our home, and in our neighbourhood, it reminded me of an idea you should keep in mind if you own a larger property and want to save tax. Let me explain.
I’m sure that you’re aware of the rule in our tax law that can allow you to sell your principal residence on a tax-free basis. There’s an exemption available, called the principal residence exemption (PRE). There are many types of properties that can qualify for the PRE, including a house, apartment or unit in a duplex, an apartment building or condominium, cottage, mobile home, trailer, or houseboat, among other less common properties.
To be entitled to the exemption, the property must be ordinarily inhabited by you, your spouse or common-law partner, former spouse or common-law partner, or a child of yours. Although there’s no hard and fast rule around what it means to “ordinarily inhabit” a property, the taxman has said that living there for even a short time in the year (during your vacation time, for example) should be fine.
Sorry, but if the main reason for owning the property is to produce income – as with most rental properties – you won’t be entitled to shelter a capital gain on the property from tax using the PRE. Our tax law also restricts the amount of land that can qualify as part of your principal residence. If your property is more than half a hectare (about 1.25 acres) in size, then the excess over this amount is not considered to be part of your principal residence and generally can’t be sheltered from tax using the PRE. But there’s an exception. If you can show that the excess land is necessary for the use and enjoyment of the property as a residence, the excess may still qualify for the PRE.
The taxman gives some examples where excess land may be “necessary” for your use and enjoyment of the property as a residence. Visit cra.gc.ca and check out Income Tax Folio (ITF) S1-F3-C2, Principal Residence. It reads: “Land in excess of one-half hectare may be considered necessary where the size or character of a housing unit together with its location on the lot make such excess land essential to its use and enjoyment as a residence, or where the location of a housing unit requires such excess land in order to provide its occupants with access to and from public roads.”
The way in which you lay out your property, then, could save you tax dollars. Consider Chester (our friend, not the hamster) and William. The two men have identical properties, both larger than half a hectare. Chester locates his residence near the front of his property with a short driveway to the road and has little behind his house except some bushes and shrubs. It’s not likely that Chester’s land in excess of a half-hectare will qualify for the PRE.
William, on the other hand, set his home back from the road further, and his driveway is much longer. He has a pool in the backyard which is set back from the residence. William occupies more of his property than Chester. It would be easy for William to argue that a much larger portion of his property is necessary for the use and enjoyment of his house as a principal residence, including the portion of land on which his driveway sits, providing access to public roads.
You’d be wise to read through ITF S1-F3-C2 and visit a tax pro to talk over your plans before entirely redesigning your property. It’s good to know, however, that some proper planning could save you big tax dollars.
Article: Globe and Mail
I recall the story a few years ago of Charles Silveira, a man from New Jersey who was convinced by woman – a psychic – to buy her a $700,000 (U.S.) home. As the story goes, he also paid her $247,850 over time because she apparently needed to make a golden statue for him to ward off negativity. According to The Star-Ledger in New Jersey, Mr. Silveira filed a lawsuit to recover his money and evict her from the home.
If Mr. Silveira were living in Canada today, he might also be eligible for cash back from the government for his home purchase. Not because a psychic convinced him to buy it (sorry, there’s no tax relief for that), but simply because our government offers a GST/HST New Housing Rebate, which can also apply to certain home renovations. Not many are aware of this rebate, and it could mean cash in your pocket.
The rebate I’m talking about will allow you to recover some of the goods and services tax (GST) or the federal part of the harmonized sales tax (HST) paid for a new or substantially renovated house that is to be used as your, or your relation’s, primary place of residence.
Generally, the taxman will distinguish between an “owner-built” house and a house purchased from a builder. In either case, you may be entitled to the rebate, but the forms you have to file are different.
Specifically, you might qualify for an “owner-built” rebate if you: (1) built, or hired someone else to build, a house on land that you already owned, (2) substantially renovated, or hired someone to renovate, your existing house (at least 90 per cent of the interior must be removed or replaced to count as a substantial renovation), (3) built, or hired someone to build, a major addition to your house that at least doubles the size of the living area (for example, the addition of a full second storey to an existing bungalow), or (4) converted a non-residential property into your house.
If you purchased a house from a builder, you may be entitled to the rebate if you: (1) purchased a new or substantially renovated house from a builder, or (2) purchased a new or substantially renovated home from the builder where you leased the land from the builder (and the lease is for 20 years or more or gives you the option to buy the land).
What type of property will qualify for this rebate? A “house” for purposes of the rebate generally includes a detached or semi-detached single-unit house, a duplex, condominium unit, townhouse, a unit in a co-operative housing corporation, a mobile home (including a modular home) and a floating home. A house can also include a bed and breakfast or similar place where rooms are rented on a short-term basis (although the building must be used more than 50 per cent as your primary place of residence if you hope to claim a rebate for the whole building).
How much can you expect back from the government? If you qualify, you can expect a federal rebate of up to $6,300. The actual federal rebate is clawed back somewhat if the value of your property is over $350,000, and disappears entirely if your property is worth $450,000 or more after the building or renovation. If you can’t claim the full federal rebate, you may also be eligible for a provincial rebate. British Columbia (for HST paid before April 1, 2013) and Ontario offer rebates that can be as high as $26,250 and $24,000 respectively. Nova Scotia also offers a rebate. Other provinces may soon offer rebates as well.
Be sure to get a copy of the booklet RC4028, GST/HST New Housing Rebate, available on the taxman’s website at cra.gc.ca and which includes provincial forms and instruction – there’s lots of information there.
You’ll need to file the applicable forms to claim the rebate: Form GST191-WS, Construction Summary Worksheet, and Form GST191, GST/HST New Housing Rebate Application for Owner-Built Houses or Form GST190, GST/HST New Housing Rebate Application for Houses Purchased from a Builder.
All owners of a property must be individuals to qualify for the rebate (no owner can be a partnership or corporation). As for deadlines, you can file for the rebate generally within two years following the substantial completion of the building or renovation of your house. Finally, if you bought or built a home or other building to rent out to individuals as a place of residence, you may be entitled to a rebate as well (see Guide RC4231 on CRA’s website).
Article: Globe and Mail