This fall, a family from east of here purchased a condo in Craigleith and spent their first week-end their over Thanksgiving.  Here is what they said in their latest email:

“We picked up the keys on Thursday evening, went home and the drove back Friday evening. We stayed for the entire long weekend. I think it was the best Thanksgiving weekend for weather I have ever seen.  The colour change on the mountain was beautiful . We had a great time (no buyers remorse). We love the location. We sat on the patio several times and had a meal while looking at Georgian Bay. We did lots of walks, went to the Village. Roasted marshmallows on the shore at night.  It was a nonstop weekend but great.  We were doing lots of shopping too, as all the wall coverings and other small items we were looking for new pictures, art, etc. to make it feel home like. Lots of fun.  Toured a lot of the apple festival studios like the rest of the tourists. Long story short we are very happy with the purchase. Looking forward to seeing you some time for a beverage on the patio.”

This wonderful family of four bought a condominium in Heritage Corners in June and here is what they had to say in an email to me last week (re-printed with permission):

“ Since June, we have been to Blue Mountain almost every weekend.  We have only skipped two weekends- one for our son’s piano concert and one for my husband’s birthday. We never realized how much joy this vacation home was going to bring to our family.  All of us look forward to going there. 

Last weekend , it  was our son’s birthday, and the forecast was not great so we decided to stay home. He was not pleased with our decision, so on Friday we decided to go anyway. I made a plan for bad weather (movies, shopping), but it turned out to be one of the best weekends ever. We went biking in the morning, and in the afternoon we went to GNE fair which was the biggest fair we have ever been  to.  We ended our day at Alphorn where we ate the world’s biggest schnitzels and the staff sang Happy Birthday to our boy who said it was the best celebration he ever had.”

They have also become fast friends and it’s a delight to both see them and hear about their adventures in discovering all the delights of our region.

The article is specifically referring to condos that are part of the Village at Blue where prices have fallen from 10-40% from their original values.  They are NOT referring to other projects in the area which have seen a steady rise in prices over the same decade.

Value is based on one thing and one thing only:  supply and demand.  In my own experience at a REALTOR® of principally resale real estate, potential buyers have a reluctance to buy at Blue out of fear regarding the associated costs of owning a unit.  Village Association dues, rental restrictions, mandatory refurbishment programs and other factors all spell risk compared to “conventional” residential condominium ownership.  Is it valid?

The costs of ownership are indeed significantly higher in the Village however, the rental revenue is also higher than in other developments.  In the end, unit owners of any condo will generally at best, find that rental income will offset some or all of the operating costs, depending on personal usage but will not cover the cost of mortgage financing.  When people buy in the Village, they need to understand that they are buying into a commercial operation, not a residential one.  They are also buying into a very specific niche market and lifestyle that appeals to some people and not to others.

Back to the article.  In my own opinion, prices may not yet have bottomed out at Blue given the large inventory of units still available.  But sitting on the sidelines may also mean missed opportunities if the perfect unit comes along or if you are anxious to begin a new chapter in life.

Today, most people seem to have a different vision of a cottage.  They want to come and relax yes but, they want all the comforts of home right down to hi-speed internet access, big screen TV’s, full municipal services, gas fireplace, recessed pot lights, granite counters and such.  Cottages have become more second homes than casual get aways, haven’t they?

I recently listed an older chalet in Craigleith that sits on a beautiful big lot on a quiet, dead-end street surrounded by beautiful tall trees.  It’s just a hop onto the trail or to the Beach and an easy drive or cycle into Town or the mountain.  It reminds me of a cottage although with six bedrooms and lots of bathrooms, I suppose it is halfway between a cottage and a house.  At a price that is much more affordable than some of the newer offerings we see today, whomever buys this will surely create comfortable memories of happy days at the cottage.

Here is what it says on the Towns’ website:

For a number of years, Town residents have been concerned with the number of dwellings within low density residential areas that have been used by vacationers for the purposes of short term rental  accommodation. During the Board Hearing, which took place in September 2010 and January 2011, several community residents came forward as witnesses citing noise, parking, garbage, nuisance, mischief, and vandalism to property as common problems relating to short term accommodation units and their users.

David Finbow, Director of Planning and Building said, “This is a tremendous success for our community.  It was through the patience, diligence and cooperation of our residents that we were able to achieve this success.  Council will now consider the most efficient way to enforce the regulations, including a possible licensing regime. The public will be kept informed as we move through this process of regulating short term accommodation rentals.”

It is worthwhile noting too that most municipalities prohibit or restrict short term rentals in low density residential areas.

Canada’s recreational property market is gaining serious traction as savvy purchasers take advantage of ideal conditions, setting the stage for what is expected to be the best market in recent years, according to a report released this month by RE/MAX.

The 2011 RE/MAX Recreational Property Report, examining sales and trends in 46 markets across the country, found that substantial equity gains and recovering stock portfolios in major centres have contributed to an upswing in demand from coast to coast.  Demand rose in 78 per cent of markets, while sales were up or on par in 41 per cent of recreational centres.   Inclement weather, including a late thaw and an abundance of precipitation, resulted in a slow start in many areas, but should be offset by stronger peak season activity.  While starting prices have remained relatively stable across the board, there are deals to be had in virtually every region – especially at the top end. Luxury sales, as a result, have climbed in almost half of the markets examined.  Inventory levels are healthy throughout the country,  although there has been some tightening reported at entry-level price points in about one-third of markets.  Some of the best selection of product in recent years is now available. 

Buyers who held off during the recession are back in recreational property markets from coast-to-coast.  Their patience has been rewarded with more affordable recreational values and greater inventory levels.   It’s the perfect storm, as ideal market conditions dovetail with wealth recovery.
 
The report also found that Americans are cashing out—especially in Ontario and Atlantic Canada.  For many, the timing has never been better.  The vast majority purchased in Canadian markets when the dollar fell to 65 cents.  These sellers are now taking advantage of price appreciation and the currency exchange.

In British Columbia, the recreational property report identified prices at or near bottom.  Astute purchasers—many of whom were scooping up product south of the border—are starting to cherry pick in markets where oceanfront prices are down from peak, pre-recession levels.  Softer values have driven up sales in Western Canada, with transactions up or on par in 58 per cent of markets, well ahead of the national average. 

Opportunities that haven’t been seen in years are now presenting themselves, especially on the West Coast.  Prices are down as much as 20 per cent from peak levels reported in 2006-2007, bringing ownership within reach to many potential purchasers.  The strengthening oil sector has also brought Albertans back into mix, driving demand for both local and coastal B.C. properties.  2011 could be the turning point.

In markets in Ontario, Quebec, and Atlantic Canada, the supply of recreational property has tightened considerably at the lower end, with potential price increases in store by year-end if momentum continues at the current pace.  

At present, 50 per cent of markets offer recreational product at $350,000 or less, including most Ontario markets, Atlantic Canada, the Laurentians and three markets in the West—Lake Winnipeg, Canmore and Harrison Lake.   Yet, even greater value exists for those willing to compromise on lot, location or type of access, such as riverfront, view properties, condominiums, fractional ownership or boat access options.

With overall economic performance improving daily and consumer confidence rising, the resurgence of Canadian recreational property markets is a natural progression.  An upswing in discretionary spending is once again drawing purchasers to what is, without question, an innate Canadian pastime.

The report noted that the composition of the country’s recreational destinations continues to evolve.  Fewer traditional cottages are available for sale than in years past.  As the desire for the year-round lifestyle continues to drive renovation and new construction activity, these waterfront properties are disappearing from the landscape.   Meanwhile, today’s average recreational getaways are truly earning the distinction as the “home away from home,” with many of the bells, whistles and comforts of their residential counterparts.  The movement is challenging local municipalities to manage the delicate balance between regional growth and natural preservation—in some instances, changing recreational migration patterns in the process.

Are

The issue is making the news here in the Georgian Triangle over two particular cases: one in Wasaga Beach and one in the Town of Blue Mountains.
 
As reported in the Toronto Star and various radio newscasts such as 680 News last week, the issue has arisen because a couple of homeowners were issued notices of zoning violation from the Town. Fines for a first offence can be as high as $25,000.00. According to the report, the Town responded to complaints about short term rentals taking place in homes designated for residential use.  The Mayor of Wasaga Beach stated that the Town only acts based on complaints but when one is made, they have an obligation to enforce the existing municipal zoning laws.

It’s true that for many years, homeowners in Wasaga Beach and many other communities in our area, have made a practice of renting out their properties to tourists for a week-end, week or short period of time to help in covering the carrying costs of what is often a second home or investment property.  I myself get close to a dozen enquiries each and every month from potential buyers hoping to do just that.  The practice is so common that they are not hidden but boldly advertised on cottage rental or classified sites and on signs.

Last year, the Town of Blue Mountains decided to pass a defining by-law addressing this very issue which is covered in more detail on a previous blog post. The decision of the Town was appealed by the owner of a local rental company and while the OMB hearing is over, a decision on that case has not yet been issued.

So back to the question – SHOULD this practice be allowed?  Some people argue that it is an unreasonable crackdown that will stop families, who have rented cottages for many years, from returning to the Beach and that it is an “out-dated by-law that will put the nail in the coffin to our tourist industry.”  They argue that if the issue is one of noise, then the Town should enforce noise by-laws instead.

On the other side of the issue, there are commercially zoned cottage courts, motels and such that pay higher tax rates and generate a living by providing accommodation to visitors.  They would argue that it is not fair to allow these types of uses in residentially zoned homes.  There are also homeowners living in subdivisions who have an expectation when they buy a home that they will not be dealing with ever-changing neighbours or homes in the area that are being operated with a commercial use.

My own opinion is that the time for the public to object to policy is when it is written – not when it is enforced.  Official plans and zoning by-laws are updated and, the public always has opportunities to press for change through the democratic process.  If they didn’t do it then, don’t try to do it when the Town is put in the position of enforcing a valid by-law.  If my neighbours start running a hotel of sorts next door, I’ll quite possibly be complaining to our by-law department and demanding enforcement.  What choice would the Town have at that point?  None.  None whatsoever.

That’s what I think.  What do you think?

Keeping the cottage in the family has a cost. Whatever the strategy you employ there will be a cost associated with it. You can potentially reduce the capital gains tax payable, but rarely can it be totally eliminated. So what will be the source of the funding.

If the value of your cottage represents a small percentage of your total wealth, say 10%, then it is likely that you will have other assets that can be liquidated to pay the tax and/or equalize the estate distribution. On the other hand, if its value represents a significant percentage of your net worth, one third for example, liquidity becomes an issue.

If your family can afford to “buy” the cottage from you for the value of the tax payable, then to a degree the problem is addressed. If they can’t then again, what can you do?

One strategy is to set up a sinking fund. You simply open a bank account and when your family members arrive at the cottage for a weekend or a week, you present them with an invoice. Perhaps you charge them $100 for a weekend and $1000 for a week. The monies you collect are deposited into the bank account and “saved”. Over time the deposits will accumulate and in ten or fifteen years there should be sufficient funds available to pay any tax bills. Essentially your family “buys” the cottage from you over an extended period.

Another strategy is to purchase a joint-last-to-die insurance policy. While this strategy does have an ongoing cost, it is the least expensive and most effective way to generate the cash needed to pay a future tax bill and equalize your estate. As an example and in rough terms the premiums for a $100,000 death benefit will cost approximately $40,000 for a 75 year old couple in good health over their remaining lifetime. That equates to about $3000 per year. The premiums could be paid by you or by the family members who are to inherit the cottage.

Keeping the cottage in the family is a major, but not insurmountable challenge. A family dialogue is crucial in order to avoid assuming what family members want.  You may want to deal with it in the broader context of an overall estate plan and not in isolation. Whatever you decide to do about your cottage will impact decisions concerning your overall estate and vice versa. You should also seek the advice of professionals – financial planners, tax accountants, wills and estate lawyers. Yes, there will be a cost, but it will be less than the tax you will save and the lawyers fees you and/or your family may pay, if litigation results. And by doing so you may also be able to preserve the family.

If you have any questions for Geoff about ownership structures or cottage succession planning, please feel free to email him at geoffrey@stonehaven-group.ca or contact him via  his website at www.geoffreyparker.ca.

This article was prepared by Geoffrey Parker who is an Investment Advisor & Certified Financial Planner with Dundee Securities Corporation., a DundeeWealth Inc. Company. This is not an official publication of Dundee Securities Corporation and the author is not a Dundee Securities analyst. The views (including any recommendations) expressed in this article are those of the author alone, and they have not been approved by, and are not necessary those of Dundee Securities Corporation.

Taxation of a capital gain is part of any investment that increases in value when it is sold. And a cottage is no exception. When you decide to transfer/sell all or part of the ownership of your cottage to a family member other than a spouse, a capital gain is realized.. At that time half of any gain in value would be added to your income for the taxation year in which the transfer/sale occurs.

Two strategies you can employ to potentially reduce tax payable are a timed transfer and the principal residence election.

With a timed transfer you sell your cottage to your family over a period of five years. This enables you to recognise the total gain in smaller increments, approximately 20% per year, potentially reducing the overall tax payable. It does require that a separate evaluation be undertaken each year.

If your family cannot afford to buy the cottage from you, and you can afford to do so, you can also take back an interest free mortgage. Essentially you sell them 20% each year and take back a mortgage for the 20%. At the end of the five years they own the cottage and you have a mortgage for the full value of the cottage. Then in your will you forgive the mortgage. The additional advantages of this strategy are the possible elimination of any potential creditor or matrimonial claims.

The Government of Canada allows anyone to claim as their principal residence, for any given year, any property that they ordinarily inhabit. Consequently, you are able to claim for tax purposes either your home or your cottage as your principal residence. You would elect the property having the largest absolute gain for a given year as your principal residence. The objective is to effect an election that reduces the overall capital gain and therefore the tax. Keep in mind you must make the election at the time you sell or transfer the ownership of one or both of your properties.

Both of these strategies require the assistance of a tax specialist. You only need to mention you would like to explore a timed transfer and the principal residence election. If your accountant is knowledgeable, they will be able to take your request and report back to you. If they scratch their head and look perplexed, find yourself another accountant.

In the final week, strategies for funding the transfer will be detailed.

If you have any questions for Geoff about ownership structures or cottage succession planning, please feel free to email him at geoffrey@stonehaven-group.ca or contact him via  his website at www.geoffreyparker.ca.

This article was prepared by Geoffrey Parker who is an Investment Advisor & Certified Financial Planner with Dundee Securities Corporation., a DundeeWealth Inc. Company. This is not an official publication of Dundee Securities Corporation and the author is not a Dundee Securities analyst. The views (including any recommendations) expressed in this article are those of the author alone, and they have not been approved by, and are not necessary those of Dundee Securities Corporation.

Background
The Wus purchased a house in Windsor, Ontario to serve as an investment for their future and to produce rental income. In 2002, they rented the house to a tenant. This tenancy was uneventful until the tenant began to date a certain man. At this point, garbage, including junk cars and tires, began to accumulate in the yard and neighbours complained of blight and rats. The Wus were given repeated notices by the City of Windsor to clean up their property. Eventually, the Wus gave their tenant notice to vacate the property. The tenant agreed to move out on August 1, 2006; however, the tenant and her boyfriend failed to leave that day. The Wus permitted them to stay until August 5, with the tenant agreeing to clean up the property before leaving. On August 4, the tenant and her boyfriend moved out of the house and gave Mrs. Wu keys to the property. As it turned out, those keys were for the front door only.

The property as left by the tenants was in a serious state of disrepair and the house had a very foul odour. The Wus, along with some friends, spent considerable time cleaning up the house and the property and, six weeks later, made the property available for renting.

During this time, and in advance of a new tenancy that was to begin on November 1, 2006, the Wus visited the property nearly every day to clean up the property and to empty the mailbox. In mid-October of 2006, a fire caused major damage to the property. On October 11, Mr. Wu visited the house and discovered that the interior was burned and that the water pipes had burst, resulting in significant damage. There was no sign of forced entry to the house, and the presence of gas cans suggested that the fire had been lit deliberately. A representative of the Windsor Fire Department opined that the fire had been intentional. There were also beer cans inside the house that had not been there the last time Mr. Wu had entered the house.

Insurance Claim
The Wus sought to claim under their insurance policy, which they believed covered fire damage and loss of rental income. Gore Mutual Insurance Company (“Gore”) denied coverage under two grounds: first, that the Wus allegedly had knowledge that the house was vacant for more than thirty consecutive days, in violation of the policy; and second, that there was a material change in risk of which the Wus allegedly were aware, but to which they did not alert Gore.

While Mr. Wu agreed that the insurance policy had a 30-day vacancy clause, he claimed that he did not know about this clause and it was never pointed out to him. In addition, he claimed that either he or his wife visited the house nearly every day and so, in his mind, the house was never truly vacant.

Unfortunately for the Wus, the term “vacant” was explicitly defined in the insurance policy, as the policy was specific to rental property. The definition provided in the policy stated that a property is to be considered “vacant” when, regardless of the presence or absence of furnishings, (i) all occupants of the dwelling have moved out with no intention to return and no new occupant has yet to take up residence, or (ii) no occupant has taken up residence in a newly-constructed dwelling. This definition makes clear that vacancy is established when there is no resident in a property. Under the terms of the insurance policy, maintaining property such as furniture in the home or frequent visitations to the home do not qualify to make the property no longer vacant.

For the Wus to have been able to demonstrate that their property was not vacant, they would have had to show that someone slept or cooked at the property and that it was someone’s “habitual abode”.

Court’s Reasoning
The court noted that case law relating to non-rental property, or to seasonal property such as summer homes which are not expected to be occupied during the winter months, provides for a different result. These divergent outcomes are based largely on the difference in wording in rental property insurance policies as compared with non-rental property insurance policies. Insurance policies relating to rental properties tend to define expressly the term “vacant,” as the occupancy status of the property relates directly to the risk of the property.

The court also found that there was a “material change in risk” under the insurance policy, and that this material change began in February 2006, upon the initial neighbour and city complaints about junk cars and garbage spread around the property. The court found that, at this point, the Wus should have told their insurer about the situation and their proposal to address the matter. The three elements of material change requiring notification to the insurer – (i) a material change in risk that is (ii) within the control of the insured and (iii) of which the insured had knowledge – were all present. The Wus’ failure to disclose a change in material risk had the effect of terminating their insurance policy.

An additional material change in risk was created when the Wus determined that the previous tenant had kept a copy of the keys to the property, but nevertheless neglected to change the locks on the doors. The Wus had decided not to change the locks upon realizing that not all prior keys had been returned as they wanted to change the locks only immediately in advance of future tenants taking up residence.

Decision
While expressing sympathy for the Wus, the court found that the property lacked insurance coverage and that the fire damage to the property was therefore not an insured risk. The Wus would need to spend nearly $130,000 to repair the house – or approximately $9,000 to demolish it.

Special thanks to Rhys Trenhaile of Manor Realty Ltd for drawing this case to my attention.