How to Keep the Family Cottage: Planning for Capital Gains Tax and Estate Preservation
Many are unaware of the impact this capital gains tax liability could have on your estate. For some, the intention of keeping the cottage in the family is not at all likely due to the fact there is not enough liquidity in the estate to cover the gain tax on the property. For others, the liquidity might be there but the estate is dramatically eroded after the tax is passed over to CRA. A lack of proper planning could mean that your family cottage won’t stay in your family. Your estate might need to sell it to pay the tax. It’s a tax time bomb that most people are unaware of and don’t plan for.
What Are Your Options?
A few different options will provide the cash required to pay this tax liability at death. It’s important to make the best choice for your situation.
The Alternatives
- You or your family can start saving today,
- Your heirs can borrow the required funds from a bank,
- Your estate can sell the asset, or
- You can purchase life insurance to cover the growing tax liability.
The Most Efficient Solution
Life insurance is often the most cost-effective planning tool to cover the tax liability at death. Life insurance provides cash to pay the tax exactly when it’s needed, helps ensure your heirs receive what you intend them to receive and puts your mind at rest because you know you’ve taken care of this important issue.
A little planning can ensure that your dream of passing the family cottage to your heirs will come true. For many people, where liquidity is not an issue, the funds are better spent during your lifetime to pay for a life insurance policy to cover the tax rather than eroding even more of the estate at your death to pay CRA.
Here’s an example that shows the growing problem:
20 years after the cottage was purchased
| Asset Type | Market Value | Original Cost | Capital Gain | Tax Payable 1st $250,000 | Tax Payable Excess | Total Tax Payable |
| Cottage | $600,000 | $100,000 | $500,000 | $66,250 | $88,333 | $154,583 |
*Assumes personal tax rate of 53%. For information purposes only.
40 years after the cottage was purchased
| Asset Type | Growth Rate | Future Value | Original Cost | Capital Gain | Tax Payable 1st $250,000 | Tax Payable Excess | Total Tax Payable |
| Cottage | 8% | $2,796,574 | $100,000 | $2,696,574 | $66,250 | $864,456 | $930,706 |
*Assumes personal tax rate of 53%. For information purposes only.
Growing Value means growing liability
Life insurance – the better choice!
- Life insurance allows you to custom design a solution to meet your specific needs.
- Life insurance creates immediate estate liquidity to pay for the tax.
- You can choose a death benefit that increases over time to match the growing tax liability.
- You can customize the amount and number of deposits you make into the plan to suit your needs.
If you intend to leave the cottage to your heirs when you pass, a life insurance strategy is the cheapest solution to ensure your gift remains in the family and protects your estate from tax erosion.