This Blog was written by Carol Willes,
One of our family’s favourite pastimes at the cottage is to build a roaring campfire and spend the evenings telling stories, singing along to guitar tunes and roasting the occasional marshmallow. Every so often, however, some unwelcome visitors show up and crash our campfire bliss. This generally happens when the fireside conversation turns to the future of the cottage once mom and dad are gone.
Our troublesome visitors take the form of three little gremlins – the sprites of cottage succession – who dance ‘round our campfire and extinguish the tranquil atmosphere. Their names are “Taxes”, “Fairness” and “Sharing”. We keep looking for ways to keep these little campfire crashers at bay.
Solutions exist for dealing with Taxes. He can be wrestled under control whenever the cottage is passed on if our parents and/or the children all contribute a portion or use insurance. The angry cries of Fairness can also be tamed with some fairly established solutions, mainly insurance and good legacy planning advice.
So often, the trickiest gremlin to tame is Sharing. She likes to have it all and give nothing back. Families and their advisors have tried many different structures to handle Sharing – inter vivos or testamentary trusts, joint ownership or co-ownership. There is a lesser known solution that may help manage Sharing – a non-profit organization.
When cottage families establish a non-profit organization, the organization itself owns the cottage, not the individual family members. Although this appears similar to a trust, rights and responsibilities differ. Those family members interested in access to the cottage become dues-paying “members” of the organization.
Among the advantages of the non-profit structure is the ability to shelter the future cottage appreciation from capital gains tax. Although the initial transfer into the non-profit will trigger a gain, future growth is protected. Probate may also be avoided as the cottage is no longer personally owned if transferred before death. The organization members draft a Membership Charter in which the cottage responsibilities, both financial and maintenance-related, can be well documented and managed. Penalties for breach of the Charter and a dispute resolution mechanism can be established and circulated along with identified events that would trigger the disposition of the property. This structure also allows family members to move in and out of the organization in a sensible way.
There are disadvantages too, not the least of which is the crystallization of the capital gain on the initial transfer. Potential exposure to land transfer tax exists and depends on the jurisdiction governing the property. And, families should always seek independent tax advice before launching into this structure as there may be deemed benefits to the members. Meticulous record keeping and financial management is required on behalf of members and there is a risk of members developing a “renter’s attitude,” particularly as the family expands and newer, more distant members come into the organization.
While this is not a suitable structure for every family, in the right circumstances, with patience, diligence and specialized professional advice, it can be a very satisfactory arrangement.