TaxMatters@EY: Family Wealth Edition – July 2022

Tina Di Vito and Ameer Abdulla, Waterloo, and Welsey Isaacs, Toronto

New rules, tax changes, family dynamics — whether your second home is nestled in Muskoka, Arizona or the Tuscan hills, it may be time to double check how you hold these assets and adjust accordingly. Families who do so now can position themselves to plan effectively while preserving the space for its true purpose: family fun.

Why rethink the way you hold and structure vacation properties now?

Family wealth, and the way we manage it, has transformed over time. Layer in the complexity of owning one — or even multiple — properties jointly with siblings or other relatives, and you may be exposed to certain tax risks. Trust rules, like filing and reporting disclosure requirements, are evolving through updates to legislation. Similarly, a family who has held a US residence within a corporation for many years may not be aware of changes in the CRA’s administrative policies on taxable benefits for personal use.1 Owning a property jointly among a handful of adult children could even send ripple effects around what you consider a principal residence today.2

Meanwhile, the concept of the family cottage itself is transforming. There’s been a marked shift in legacy cottage country properties growing to include multiple dwellings. Bigger than that, where once a lakeside property and summer went hand in hand, we increasingly see Canadians investing in vacation homes right across provinces, states and even continents — think an inherited home in Portugal or jointly purchased property in the South of France. That redefinition of where we spend our time unwinding as a family brings new implications across tax, estate planning, succession and more. For instance, properties held outside a province or country of residence come with additional estate planning considerations in regards to administering a power of attorney or a will in a foreign jurisdiction. This brings new questions, like whether it might be wise to have a separate power of attorney and will for international properties.

At the heart of these trends lies one highly significant factor: family expectations. For one group of siblings, that could mean the ever-complex decisions around what to do about a legacy property granddad built but no one uses anymore. For another, it could come down to navigating how property taxes and upkeep are managed when some relatives make much greater use of the home but others feel they’re called on disproportionately to care for it.

Put simply: many families who jointly own property don’t know what they don’t know. Carving out a little time by the dock, ocean or mountain this summer to ask a few key questions can help anyone looking to navigate this complexity and ensure their family is set up for success.

Important questions include:

1. Is this property ultimately intended as a legacy property? If you’re hoping to pass the home on to the next generation, start thinking about the logistics now. That means not only who will be sharing the residence, how that group holds the property itself and what options are available if someone wants to sell their share, but how they’ll manage it. Map out how maintenance, renovations and any other costs will be navigated ahead of time. Consider whether it’s time to establish a “cottage fund” that covers maintenance or capital expenditures. Discuss usage and other rules, and give some thought to the potential of a “cottage sharing” agreement. Tools like these can reduce the chance of misunderstandings and conflict. True, too, for building in a clause around what happens if problems arise or someone wants out. Include the property in estate and succession planning discussions so there’s no confusion over time.
2. Do we view the property as a potential source of income? Whether your family shares a condo in Florida or a ski chalet in Whistler, people may have very different views of how to monetize the property when no one is there. And those opinions may be personal. One individual may be uncomfortable with the idea of packing family mementos and pictures away to make room for anonymous guests. Another may be craving a new source of regular income that will generate tax and legal implications that should be considered. It’s important to remember that a change in use of the property from personal use to rental use may trigger a deemed disposition and reacquisition of the property for Canadian income tax purposes. This may result in a taxable capital gain if the property doesn’t qualify as a principal residence for all years of ownership.3 Also, if ownership of the property is transferred from one generation to the next, whether this is done by sale or by gift,4 a capital gain could result if the property has gone up in value.5 Reconsider these issues and allow space for robust conversation once every couple of years to make sure family members are still on the same page.
3. Are we exposing ourselves from a capital gains tax perspective? Chances are, if a family has owned a property for a long time, no one’s thought much about how their stake may impact the way a principal residence is taxed. If you own more than one property that may qualify as your principal residence, such as a house and a cottage, an analysis should be done to determine which property should be designated as your principal residence for each taxation year in which the properties are owned. In addition, Canadian tax rules now require you to report the sale of a principal residence on your tax return for the year when the sale happened, so you need to be clear about which property you’re claiming as your principal residence for which years.6 There are also a number of other taxes that individuals may have overlooked in the past, such as GST/HST, land transfer tax and nonresident property/speculation taxes, which may have changed or been introduced in recent years. Canada is not alone in increasing taxation and reporting of vacation properties; governments around the world are also increasing their taxes on nonresident owners and cracking down on noncompliance with existing rules.7 Addressing this now could provide important insight, reveal ways that legislation may have put you at a disadvantage and promote fruitful conversations to help you make the most of every property you own.
4. Should we be moving the property into a family trust? Just because you’ve always held the property a certain way doesn’t mean that’s the best path forward. Corporations may — or may not — be the best way to hold a vacation property. Also, unwinding a structure like this can be time consuming and costly. Trusts can allow for some flexibility in administering the property,8 but bring their own complexities. For instance, what happens if a beneficiary — like a child or grandchild — becomes a US citizen? It’s best to get advice on holding a property in a family trust and zero in on the rules regarding filing and disclosure requirements, which have become more onerous than in the past.9 Get clear legal perspective on your family’s situation and the potential upsides a family trust might provide. This structure may not work for every family. You’ll need a big-picture understanding to make that call. Same goes for understanding what it means if your cottage is already held in a trust, where the pros and cons lie and how to make a change if it’s needed.
5. Is the property located in a different country? Whether you own a winter property in Florida or a pied-à-terre in Paris, you’ll want to consider the tax, legal and administrative factors of owning foreign property. Depending on the total cost amount of all your foreign property and how you use the vacation property, you may have to file Form T1135 with the CRA each year.10 Foreign withholding taxes may apply if you earn rent from the property or when you eventually go to sell, and there may also be tax filing requirements in the foreign jurisdiction. If you have a property in the US, you’ll want to consider whether you may be subject to US estate taxes when you pass away. You may also want to think about putting in place separate wills and powers of attorney for your foreign assets to minimize probate and ease administration for your heirs.
   
6. Has anything changed since we last talked? Whenever a significant life event occurs, such as a death, divorce or relocation, the way you structure joint home ownership may have to adapt accordingly. Having regular conversations every year helps you stay ahead of the big-picture planning that vacation homes in Canada or abroad can entail. Balance those proactive conversations with equally important chats any time a major shift happens in the family unit. For example, if a family member gets married during the year, it’s wise to consider the legal implications relating to ownership of the vacation property. It can be difficult, but it’s essential that you address significant change strategically, as and when it happens.

What’s the bottom line?

Owning property as a family can be a wonderful way of strengthening bonds — and a source of disagreement capable of shaking those same relationships. Getting clarity on what the property means, how it’s held and the ways you hope it will evolve over time can help families take a pragmatic approach to joint ownership. Doing so before a problem or crisis arises gives you the longest possible runway to preserve the very best part of family properties: great times shared together.

To speak with an advisor about your vacation property planning or other family planning matters, please contact us today.

Lucie Champagne, Alan Roth, Yiyun Chen and Candra Anttila, Toronto

We've updated our popular personal tax calculator and rate cards to reflect budget proposals and news releases up to June 1, 2022.

Frequently referred to by financial planning columnists, our mobile-friendly 2022 Personal tax calculator lets you compare the combined federal and provincial 2022 personal income tax bill in each province and territory. A second calculator allows you to compare the 2021 combined federal and provincial personal income tax bill.

You'll also find our helpful 2022 and comparative 2021 personal income tax planning tools:

• An RRSP savings calculator showing the tax saving from your contribution
• Personal tax rates and credits by province and territory for all income levels

In addition, our site offers you valuable 2022 and comparative 2021 corporate income tax planning tools:

• Combined federal-provincial corporate income tax rates for small business rate income, manufacturing and processing income, and general rate income
• Provincial corporate income tax rates for small business rate income, manufacturing and processing income, and general rate income
• Corporate income tax rates for investment income earned by Canadian-controlled private corporations and other corporations

You'll find these useful resources and several others — including our latest perspectives, thought leadership, Tax Alerts, up-to-date 2022 budget information, our monthly TaxMatters@EY and much more  —  at ey.com/ca/tax.

Tax Alerts – Canada

Tax Alert 2022 No. 33 – SCC closes another door on equitable relief
On 17 June 2022, the Supreme Court of Canada (SCC) released its much-anticipated decision in Attorney General of Canada, et al. v. Collins Family Trust, et al., 2022 SCC 26, confirming that the equitable remedy of rescission is not available to remedy adverse tax consequences.

Tax Alert 2022 No. 34 – 2022 Budget implementation bill receives Royal Assent
Bill C-19 implements certain tax measures announced in the 2022 and 2021 federal budgets, as well as various other measures, all of which were included in a detailed notice of ways and means motion tabled in the House on 26 April 2022.

Tax Alert 2022 No. 35 – Canada’s new Underused Housing Tax Act receives Royal Assent
On 9 June 2022, Bill C-8, Economic and Fiscal Update Implementation Act, 2021, received Royal Assent. Bill C-8 implements certain measures announced in the federal economic and fiscal update tabled on 14 December 2021, as well as Canada’s new underused housing tax.

Summary

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