Cottage Life

A family asset that everyone enjoys

Every summer, thousands of Canadians pack their bags and their families into the car on Friday afternoon, and leave their homes behind. Their destination: the family cottage.

For many, the family cottage is like a second home. It's a chance to enjoy some down time from their fast-paced city life, relax in the beautiful outdoors, and spend invaluable time with friends and family. It's an asset that generations, both younger and older, can enjoy. In short, it's a reward for everyone's hard work.

Keeping it in the family

For taxation purposes, a cottage is considered a capital asset. As such, it is treated like all other capital assets. When the owner dies, it can be automatically rolled over to his/her spouse, tax-free. However, upon the death of the surviving spouse, it's deemed to be disposed of at fair market value. The result? Probably a hefty tax bill. And if the heirs don't have the cash on hand to pay those taxes, chances are they'll have to sell the cottage to do so. Consider the following example:

Mike and Kathy are both 60 years old. Thirty years ago, they bought their cottage for $40,000. It's now worth $180,000. If anything were to befall both Mike and Kathy, their heirs would be faced with an unpleasant decision: sell the cottage or come up with approximately $35,000 in taxes. Luckily, there is another option.

By purchasing a joint-last-to-die insurance policy, Mike and Kathy can prepare for the eventual tax bill. On the death of the second spouse, the proceeds from the insurance policy could be used to pay the taxes owing on the cottage. The result? Their heirs would be able to continue enjoying that cottage for years to come.

As you can see, for the cost of an affordable monthly premium, Mike and Kathy can ensure that their cottage remains in the family. Who should pay those premiums? Obviously, one option is Mike and Kathy. However, another option is their heirs. After all, considering that their heirs are the ones who ultimately stand to benefit, they probably wouldn't be averse to paying the monthly premium.

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The information contained herein is considered accurate at the time of posting. CIBC and CIBC World Markets Inc. reserve the right to change any of it without prior notice. It is for general information purposes only.