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BMO Financial Group

October 15, 2014 07:00 ET

Cottage Country: BMO Provides Tips for the Financial Ins and Outs of Buying and Selling a Cottage

TORONTO, ONTARIO--(Marketwired - Oct. 15, 2014) - With summer officially over and Canadians bracing for the autumn chill, some cottage owners are contemplating if it is time to sell or transfer ownership to another family member. In the case of prospective buyers, now may be the time to begin looking for a cottage so they have one before next summer.

Whether you are looking to sell, transfer ownership, or buy a cottage, there are many financial considerations to keep in mind.

"Cottages tend to be used for a limited amount of time during the year, but the financial considerations are just as important as a home," said Wendy Cooke, Regional Vice President, Personal Banking for BMO Bank of Montreal. "Before buying a cottage, evaluate what you can afford and whether it will fit into your overall financial budget."

Ms. Cooke noted that that the combination of mortgage, property taxes and utilities should not make up more than 30 per cent of your household income. Furthermore, there are cases when a buyer may not be eligible for a conventional mortgage. For properties on leased land, in a remote location or no access to roads or hydro, buyers may need to get a collateral mortgage with rates more closely tied to regular loans, which typically have a higher interest rate.

Expenses can add up when buying a cottage, compared to a home in the city. Land transfer taxes can vary and appraisals can be more expensive because there may not be a certified expert nearby. There are also maintenance costs - taxes, insurance, utilities and renovations.

Succession Planning

Before transferring the cherished cottage to another family member, there are financial implications to consider. The primary concern is capital gains tax due when the cottage is sold or inherited. When owning a house and cottage, generally one property can be sold tax free but the other will be subject to capital gains tax, which applies to 50 per cent of the profit. In most cases, it makes sense to use the principal residence tax exemption on the property which has experienced the greater appreciation (on an average per year basis).

"Keeping a cottage in the family can mean a sizeable capital gains tax for the family at the time of transfer," said John Waters, Vice President, Head of Tax & Estate Planning, BMO Nesbitt Burns. "It's important to be strategic so you don't leave your heirs with a significant tax burden that may force the sale of the cottage. Have discussions with your family and also with financial and legal experts who can provide guidance on options available to you."

A parent that is bequesting ownership of the cottage to the next generation will have the comfort of knowing they will not be leaving their family with a significant tax burden, since the tax can be paid using the proceeds from the life insurance policy.

BMO provides the following tips for those thinking about purchasing a cottage or transferring an existing cottage to a family member:

Stay grounded: Treat the cottage purchase as you would a home purchase. Take market conditions into account and determine how the property fits with your financial plan, including both the short and long-term financial impact.

Pay the tax now: You can choose to trigger the capital gain by transferring the cottage to your children now and paying the tax on any gain accrued to-date. Your family will have to pay the tax on any future gains in value.

Set aside the funds to pay the tax later: Estimate the potential gain in value and establish a fund where you and/or your heirs deposit money to cover the future tax liability.

Use a life insurance policy: The tax-free death benefit proceeds can be used to pay off the estimated capital gains taxes due.

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About BMO Financial Group

Established in 1817 as Bank of Montreal, BMO Financial Group is a highly diversified financial services organization based in North America. The bank offers a broad range of retail banking, wealth management and investment banking products and services to more than 12 million customers. BMO Financial Group had more than $586 billion in total assets and approximately 47,000 employees at July 31, 2014.

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