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CAROLYN LEITCH

Saturday, June 07, 2003

Nothing can divide a family like dividing the family cottage.

"It's a substantial asset, it's indivisible and the entire family has an interest because of the emotional attachment," says Christine Van Cauwenberghe, director of tax and estate planning at Investors Group Inc., in summing up the reason why so many families fall out over a patch of land. "It's difficult to transfer to the next generation without causing emotional strife or financial strife."

Ms. Van Cauwenberghe recommends parents start -- and start early -- by talking with family members just to find out who's interested in the cottage and who's not. In some cases, she says, parents are astounded to find that some family members want no part of the upkeep and expense of owning a cottage.

"Parents assume that all their kids want the cottage, and once they start to hammer out the nitty gritty, they realize it's just not worth the agony."

Ms. Van Cauwenberghe advises against dividing ownership of the cottage among family members unless the group can agree in advance who will use the cottage and when. In the case where one child wants the cottage and another doesn't, the parents are then left to consider how they can equalize the estate.

Karen Yull, a principal at accounting firm Grant Thornton LLP, is working with a family facing that dilemma.

A widower with four children has watched the value of his cottage in Ontario's Muskoka region soar to about $1.2-million, from about $500,000, in the past five years.

While the siblings have agreed that one son will inherit the property and the others will receive an equivalent amount from the sale of a house in the city and other investments, the value of the father's remaining assets won't provide an equal amount for the other three.

"You can tell it's causing friction in the family," Ms. Yull says. She adds that the family is still searching for the solution.

Often, in the case of a family that doesn't have a lot of other assets besides the cottage, buying insurance is the answer, Ms. Van Cauwenberghe says, because money from insurance can be split up among the remaining heirs. A nest egg from insurance can also be used by the heirs to pay any capital gains tax owing on the cottage when the estate is settled.

The pros point out that taxes can cause headaches if families do not plan ahead.

Ms. Van Cauwenberghe says one trap owners need to watch out for is transferring ownership of the property to the kids before the owner's death.

If the owner passes it on, or even adds another name to the deed, he or she may face a tax bill because Canada Customs and Revenue Agency assumes it was transferred at fair market value. In the worst-case scenario, the kids may then turn around and sell it, which could trigger more tax.

"You either have to gift it or sell it for fair market value" to avoid double taxation, she warns. Each family unit is also entitled to designate one property as its principal residence each year. The exemption is also available on death.

In the case where the cottage is not deemed a principal residence and therefore exempt from capital gains tax at the time of sale, Ms. Van Cauwenberghe recommends owners minimize future capital gains tax by keeping track of capital improvements.

Ms. Van Cauwenberghe points out that, in the case where heirs become joint owners, some may have a harder time than others paying their share of the taxes and upkeep on the property.

She says it's sometimes a good idea for joint owners to insure each other so that money from the policy can pay for taxes and repairs down the road -- or the outright purchase of the remaining share of the property -- if one of the owners dies.

"If there's no mechanism for dispute, it really can poison a good family relationship."

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