Protecting real estate after death – Canadian NPO
Structure your real estate investments to preserve your assets on a tax-effective basis.
If you are considering acquiring a domestic vacation property, you can avoid common pitfalls and take full advantage of opportunities by using appropriate structures to preserve your assets and do so on a tax-effective basis.
My client, David, was concerned that with the growth in the future value of summer vacation properties near Toronto, Canada, there will also come increased tax liability associated with such a vacation property. David asked how to structure the ownership of this property, so that the transfer ultimately to his heirs could be done with minimal cost in terms of tax and administration.
I explained that on the death of each Canadian resident, he or she is deemed for income tax purposes to have disposed of all property, including ones such as this Canadian vacation property, and to have realized proceeds of disposition equal to the then fair market value of such property. Similar rules apply in respect of a gift of the property during his lifetime. In other words, capital gains tax may become payable on such transfers.
Furthermore, when his Will would be probated, the value of this Canadian vacation property will be taken into account in calculation of the applicable probate fee (1.5% of the value of the assets covered by the Will). Moreover, the filed Will would become a public document.
If he were to use a trust to hold this Canadian vacation property, the trust would be deemed to have disposed of this property every 21 years for proceeds of disposition equal to the then fair market value.
Instead, I recommended that David establish a non-share capital, not-for-profit corporation (“NPO”). David and his spouse would run the NPO like a recreational club. To be cautious the NPO would lease the vacation property to David and his spouse, and they would pay a minimum rental at least equal to the operating expenses.
As the NPO will continue after they die, there will be no capital gains tax on either death (the life interests merely expire). In addition, there would be no probating of Wills necessary. Their children as the successor directors and members would continue to run the NPO.
If the NPO were to sell the property, there would be no capital gains tax payable. The proceeds could be invested in another property to be used as a club and the tax deferral could continue.
If the proceeds were distributed, say, on a winding-up of the NPO, the member(s) would be considered to have realized capital gains on any increase in value above the initial cost when the property was purchased.