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6 min read
Overview
Dad lose their capacity, and how and by whom the significant capital gains tax will be paid when Mom and Dad die.
Clients are increasingly looking for ways to proactively address this issue, including holding family meetings and implementing structures to create a roadmap for the family.
Power of Attorney Clauses
able to visit the cabin. C begins acting as power of attorney. As a fiduciary, C must do what is best for B. Is continuing to pay all ongoing expenses and costs for the cabin from B’s assets in B’s best interests? Or should the cabin be sold? C would like to continue to use the cabin, and both C and D don’t want to sell it yet. C is in a conflict of interest.
A and B might consider adding clauses in their power of attorney that explicitly provide directions to their attorney on payment of ongoing costs and usage of the cabin if they lose their capacity. If their wishes are explicit, then C has been given clear direction and is exonerated from the conflict of interest.
Inter Vivos Trusts
The transfer of the cabin into the trust would trigger a deemed disposition, and A and B would need to pay the capital gains tax on the cabin in the year of the transfer. Every 21 years, the CRA would deem the cabin sold, triggering further taxable gain unless further planning is done in advance of the 21-year anniversary. The trust would also need to fund and maintain a maintenance fund for payment of property taxes and day-to-day costs of cabin ownership.
If A and B are over 65, Canadian citizens, with no U.S. residence, citizenship, or green card issues, they could transfer the cabin into an alter ego or joint spousal trust, thereby delaying the deemed disposition and capital gains tax until the last of the two dies and avoiding the deemed disposition every 21 years. To qualify for this delayed deemed disposition, the sole beneficiaries of the trust must be A and B during their lifetimes. If A and B are no longer using the cabin and C is using it frequently and freely, this could technically put the trust offside, but to date we have not seen the CRA raise this issue on a trust audit.
In Alberta, we cannot register a trust as an owner of land. It must be registered in the name of the trustee. Therefore, alternate trustees should be clearly laid out, and a caveat could be filed on the land to protect the trust’s beneficial ownership.
If children are beneficiaries of the trust and they enjoy regular usage with their families, they should be encouraged to enter into marriage agreements (or equivalents) at least addressing the beneficial interest the child holds in the cabin.
In other Canadian jurisdictions, substantial transfer fees may apply with a change of ownership, payable by A and B when the cabin is transferred into the trust. This may be a considerable negative factor in considering this option.
Given the increased compliance costs of annual trust tax filings and transparency reporting, the triggering of taxable gains, and the deemed disposition every 21 years, ownership of cabins through a trust is currently a less popular option than other approaches.
Corporate Ownership
A and B could consider transferring the cabin into a corporation. Such a transfer would trigger capital gains tax immediately, to be paid by A and B. Once in the corporation, A and B could be the sole shareholders and implement a Unanimous Shareholder Agreement setting the terms of how ownership would transfer on their death or incapacity, and any terms for sale of share ownership to others. If children are or will be shareholders, clarity regarding transfer to spouses, plus marriage agreements excluding the interest in the cabin, should be addressed.
Corporate ownership avoids the 21-year deemed disposition imposed on trusts, but it does create a taxable benefit for the users of the cabin. The corporation would need to fund and maintain a maintenance fund for upkeep of the cabin and would have annual corporate and tax filing obligations.
Usage or Co-Ownership Agreements
If A and B decide to keep ownership of the cabin in their names but encourage usage by family members, including during any time frame when A and B are not using the cabin and/or are incapacitated, a detailed usage agreement aids in setting clear expectations and reducing tension. Such a usage agreement might set out heated topics such as who gets the cabin during holidays and prime summertime, who pays for what, the rules of cleanup and cleaning fees, broken items, contributions to maintenance, storage of items, etc. Some usage agreements require an annual general meeting to work through details and schedules for the coming year and to fine-tune any points of tension. Such usage agreements may also be helpful as a template after A and B die, when their children are navigating the waters of what is ‘fair,’ assuming they have shared ownership. It is also good evidence of Mom and Dad’s intentions regarding the cabin if they lose capacity.
Test Run Clauses in the Will
A and B may recognize that their emotional attachment to the cabin might not be equally shared by C and D. Life circumstances or interests for C and D could also change over time. Although C may now say they are keen to take over ownership of the cabin in lieu of other assets in the estate that would go to D, C may have a different view after A and B pass. A and B might include a clause in their will to allow the executors to keep the cabin in the estate for an extended time, perhaps three to five years. A maintenance fund would be set aside, and the costs of upkeep of the cabin would be paid by the estate. During that time, C and D could test the waters of enjoying the cabin after Mom and Dad. After a set or agreed-upon time frame, C and D could be offered the opportunity to purchase the cabin for an agreed price or according to a valuation formula, using part or all of their inheritance, often called a right of first refusal. If neither C nor D wishes to purchase the property, it would then be sold and the net proceeds split between the two of them.
Conclusion
As we can see, there is no one perfect solution to the cabin issue. If transparent discussion among family is possible, it may go a long way toward reducing tension down the road. At a minimum, it will alert the current owners to the issues they need to address and shore up in their planning.
Family cabins carry emotional value, but without careful planning they can also become a source of conflict, tax exposure, and unintended consequences during incapacity or after death.
Contact our Wills, Estates + Trusts Group to discuss your planning strategy. Amie Heil and Ronda Johnson can help you protect the property, clarify expectations, and create a plan that balances fairness, flexibility, and tax efficiency.
