Careful planning helps ensure the family cottage is cherished for generations
VACATION HOMES AT WORK
As baby boomers consider their retirement and the legacy they wish to leave for their families, one dream looms large – the cherished family cottage. But without careful planning, this purest of pleasures can turn into a source of tax, estate and family trouble. “When we ask a client to tell us what’s most important to them, it’s amazing how many people list their family cottage,” says Andrew Guilfoyle, a financial advisor and chartered accountant in Toronto.
“They remember sitting on the dock under the stars with their parents or grandparents, or teaching their kids or grandkids to swim or canoe during long weekends. A cottage has a place in the heart of so many Canadians – it’s been the source of some of the happiest memories for generations.”
Not surprisingly, many baby boomers view a cottage as both a retirement residence and an important element of the legacy they want to leave to their families. “We do comprehensive financial planning, and most people don’t dream about leaving their home in the city or their RRSP to their kids,” says Mr. Guilfoyle. “They don’t dream about leaving a specific mutual fund to a grandchild. But the true value of the cottage is more emotional than financial, and there is no amount of money that can buy those memories.”
Mr. Guilfoyle, whose ‘family time’ includes working with his father Gerry and brother Blair at Guilfoyle Financial Planning, says, “My parents bought a cottage about 10 years ago. What we’ve found is that it is an amazing place for family, because suddenly you’re up there for the weekend rather than rushing off in different directions after dinner.”
But as a financial advisor and chartered accountant, Mr. Guilfoyle is careful to point out the potential pitfalls of owning a cottage as well. “As with any large financial purchase, impulse buying is not prudent. People sometimes spend years researching the market. It is always a good idea to rent a cottage to ensure that it is in an area you want to make a major purchase in, and to find out if owning a cottage is really right for you.
There is significant maintenance required, and it can be a fair amount of work. You definitely don’t want to buy because you’ve had one great weekend at a friend’s cottage.” Once the decision is made, it’s important to be aware of the issues specific to owning vacation property. “Banks are a little more reluctant to lend for a second home, so you’ll want to be careful about your debt ratio. When there are property booms and busts, cottages decrease in value much more quickly than homes in major urban centres, primarily because they’re more of a luxury. If you stretch financially to buy a cottage in prime areas, within two hours of Toronto or on Bowen Island on the West Coast, for example, and you lose your job in a general economic downturn, you may find there are a lot of people trying to sell properties like yours. There have been times, such as in the early ’90s, when you almost couldn’t sell at any price. If liquidity is an issue for you, you have to tread carefully.”
Chartered accountant Colleen Gibb agrees that affordability has to be carefully examined. “Can you make the mortgage payments and keep up with the property taxes, which are getting really high in cottage country? Can you afford the maintenance that will be required? A lot of people believe that if they buy a cottage and rent it out for a couple of weeks, they can write off all expenses, which will make owning a cottage affordable – but if you rent your cottage out for a month each year, you get to write off one-twelfth of expenses. It is a very common misunderstanding.”
If passing on your cottage to your children is important to you, don’t make the mistake of leaving them out of the planning. “It’s often left up to the kids to sort it out on their own once the parents are gone, but that is by far the worst possible plan,” says Mr. Guilfoyle. “It can lead to real bitterness among siblings – one might say ‘How can you think of selling this cottage with all the family memories we’ve had?’ while the other has an immediate cash need and wants to sell the property. Talk with your family, and work with your advisors to implement the right solution for you.”
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