Photo Illustration by The Globe and Mail. Sources: Getty Images
The beneficiary: After four decades in finance as a commercial lender, 60-year-old “Matt” is loving every moment of retirement with his wife at their home in cottage country. It’s now his (almost) full-time abode as his wife treks back and forth to their primary residence in the city. By the lake and with the new luxury of time to spare, Matt – one of three siblings and with three grown children of his own – is doubling down on his passion for genealogy and family history. Keeping the country home forever and ever is the goal.
The inheritance: Matt’s cottage-turned-house is the former property of his great-great-great grandfather, a wealthy railway baron who originally owned about 5,000 acres in the region, which played a role in another profitable endeavour, whiskey distilling. Matt’s mother inherited a far more manageable 23 acres – plus an enviable 1,500 feet of water frontage – in the 1960s, still a few years before Canada adopted capital gains tax in 1972.
Matt’s cottage is filled with priceless-to-him family heirlooms such as furniture, photographs, art, antlers and canes tucked away behind the stone walls his great-great-grandfather built. But Matt estimates the plot with the house on it is worth well over eight figures today.
What this 50-year-old plans to do with a $333,000 inheritance from her very frugal mother
What they did with it: Three decades before her passing, Matt’s mother was already fretting over how they’d possibly manage an impossibly large capital gains tax bill – probably $4-million or $5-million. “My siblings and I wouldn’t ever have been able to pay that so we’d have to sell the property,” he says. Realtors, in fact, reached out incessantly figuring there was no way to keep it and of course they’d have to sell the property. But what if somehow they didn’t?
In order to move forward, amateur historian Matt first looked back. “Before capital gains tax, Canada had something called succession duties,” he explains. Introduced in 1892 in Ontario, succession duties taxed the recipient based on their relationship to the deceased. “Class A” was direct descendants, including grandchildren, who enjoyed the lowest tax brackets and qualified for the most exemptions. “To avoid a whole second layer of succession duties, cottages would often skip a generation and go right to the grandchildren,” says Matt.
Matt hoped a similar strategy might work in a modern age. “I worked in finance so I knew we had to do something, so we engaged a top law firm and a chartered accounting firm and started discussions,” says Matt. Their solution, which went into action when his mother died a few years ago: “We incorporated the property into a corporation, put shares of the company into a trust and made the grandchildren – my kids and their first cousins – the beneficiaries of the trust.”
More Canadians will inherit their family home, entrenching inequality across generations
What they learned: Technically, because of the trust, the inherited century-and-a-half-old home isn’t actually his, though he does control a block of preferred shares. “My siblings and I don’t have any equity, but we do have control over what happens, and obviously we pay the bills for the place.” The next generation will inherit the property properly when the trust winds down on its 21st birthday, as per Canada’s 21-year deemed disposition rule, and because of the particularities of their set up, the taxes won’t come due until the deaths of the beneficiaries, hopefully in the far distant future.
Yes, that’s correct, Matt’s family’s multimillion-dollar capital gains tax bill isn’t due until the death of his children. “They’re in their thirties now, so hopefully this won’t be for a very long time, and I’ll be long dead,” says Matt, who’s personally relieved of writing the cheque but doesn’t consider this a tax dodge in the least. “Absolutely no, no, no,” he says. “Capital gains are still there and are going to happen at some point, we’ve just deferred them. It’s always good to pay tax tomorrow rather than today.”
Won’t an inevitable tax bill to the grandkids be even bigger in the future? “Nobody can predict the future,” he says. “Cottage property values could collapse due to global unrest or World War III.” Whether the bill is much higher or far lower or non-existent in a postwar apocalypse, what matters to Matt, he says, is that he still has the property today. “I have it now and my kids will have it their entire lives because of the action we took.” And if there is an apocalypse, you must admit, Matt and his family will have just the place to go.
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