Cottages are more than the materials they are made of. They are places that create and hold precious memories for your family.
Mary Beth Plumpton, Vice President at HUB International, says “The primary house we grow up in is always special. But a cottage is invested with even more emotion because that’s where families and friends escape as a refuge. It’s where we gather to celebrate each other, have fun and create stories that last a lifetime.”
It’s because of this emotional investment that the forced sale of a cottage owing to tax burdens, family strife and other factors can infinitely compound stress and grief. Fortunately HUB International has partnered with leading insurance companies to offer Canadians the HUB Cottage Life Insurance Policy - a way to help protect your property for future generations.
HUB’s cottage policy is an easy and affordable way to insulate your family from the burden of capital gains taxes. In 1972, Canada’s federal estate tax was repealed. In its place, the country’s income tax régime was revised to incorporate consequences arising from the death of a taxpayer, which often results in tax being owed. As pertains to cottages, the changes amounted to an allowance of only one tax-free principal residence. Cottages are a second residence subject to capital gains when sold or inherited.
Plumpton offers a scenario that clarifies the situation in layman’s terms. She says, “Grandma and Grandpa built a log cabin in the 1920s. In 1972, the property value was evaluated in accordance with the new law. Let’s say it was priced at $300,000. At the end of that year, the original owners pass away, handing the cabin down to their only child.”
Continuing the story of our fictional family, in the ensuing decades, Grandma and Grandpa’s sole heir makes additions and upgrades to the property. He or she dies leaving three children to split the rights. The cottage is revalued again and because of the family’s investments and a boon in the housing market, the property has escalated in value to $600,000. Even after deducting expenses related to home improvement, a serious amount of money is owed to the government one way or another.
Plumpton has witnessed the grief these types of situations may produce, noting, “It can really tear a family apart. It’s heartbreaking. Those who can’t afford the taxes have to sell and a valuable, emotional asset passes out of their hands.”
In another version of our three adult children inheritance scenario, perhaps one of the kids wants to retain the cottage but can’t pay the tax burden. The other two have the money but no desire for responsibility. This is a different kind of tragedy that is no less disconcerting.
That’s when a Cottage Life Insurance Policy can save a grieving family from coming apart. Upon the death of a current cottage owner, a traditional life insurance policy is paid out. But within that policy, money is provided for paying capital gains taxes on the property, reimbursing other family members for their shares, or both. It really is that simple, and according to Plumpton, inexpensive.
She says, “The cost of coverage is one or two percent of what the eventual need is going to be. And we don’t expect our clients to do the math. We help them figure out how much coverage they’ll need, factoring in the value of the home, the estimated tax burden, and the wishes of the inheritors – sell, retain ownership, etc. “
The psychological trauma of having to part with a family cottage due to financial burdens is one that families can spare themselves from enduring. Education and awareness are important – as is a conversation with your HUB expert. But Plumpton has one final caution for cottage owners planning for the future: “Establish your road map in times of calm. Mourning the death of a parent is no time for worrying or arguing over tax liability. It just adds extra grief.”
With the coming of the summer cottage season, Plumpton encourages families to make cottage succession plans part of the holiday gathering itinerary. Within the confines of your happy second home, develop plans to protect that joy for the next generation.