Experts warn against willing it away

Proper planning avoids nightmare situation for heirs

What are Canadians, particularly the massive Baby Boomer generation, going to do with increasingly valuable real estate?

According to a new CIBC poll, many of them will be leaving assets, including recreational properties, to heirs in their wills.

And while it may be done with good intentions, Jamie Golombek, managing director of tax and estate planning for the bank's Wealth Advisory Services, says without proper planning, that real estate could end up on the housing market, as those heirs sell properties to deal with all sorts of tax issues.

The poll shows while 51 per cent of Canadian expect to leave assets to heirs when they die, 70 per cent of those Canadians expect to pass down real estate, including vacation homes that may have been in the family for generations.

While the percentage in Alberta is slightly lower than the national average at 69 per cent, the value of those Albertans' assets is significantly higher than the national average ($530,000 versus $380,000).

The only province higher was B.C. with average overall assets of $539,000.

Golombek says the Alberta numbers are not surprising given low tax rates and accumulated wealth that includes both an increased value in local real estate and in ownership of second homes in places like B.C. and the U.S., where values may have also increased dramatically.

The CIBC tax expert suggests Canadians look at a variety of tax options, including considering closely what they declare to be their primary residence — which is not subject to capital gains taxes under the Primary Resident Exemption (PRE) — when selling a property. As long as a Canadian goes to that home every year, it can be cited as a primary residence, even if it is in the U.S.

"The biggest problem is people don't plan," said Golombek. "They leave real estate to their kids and, if not done properly, that inheritance can turn into a time-consuming mess — one that 'leaves money on the table.'"

Bestselling real estate author Don Campbell, founding partner and senior analyst for the Real Estate Investment Network, says he expects an increasing number of Canadians could also look at transferring their homes to those heirs (many of them in the Millennium generation which is just as large as the Baby Boomer one) — while remaining in them until their deaths.

That has become more feasible with a change in secondary suite provisions by Canada Mortgage and Housing Corp. (CMHC).

While analysts have long been warning that Boomers will flood the real estate market by selling expensive, large homes to downsize, Campbell says for those now retiring, the last thing they want to do is leave their friends, their family, "their favourite coffee shop."

The CHMC changes allow 100 per cent of the rental income from legal secondary suites to be used when qualifying for a mortgage. This, says Campbell, allows parents to sell their homes to children who can qualify for a mortgage on a higher value property while allowing the parents to remain in the home — closer to their grandchildren — in a secondary suite.

He predicts this option will become increasingly mainstream as more people become aware of it — something he is already seeing in Boomer discussion groups.

Campbell says the CIBC poll pinpoints the important issue of growing value now found in real estate, citing people who purchased homes many years ago for $35,000 that are now worth $900,000.

That, he says, includes Alberta residents who, while having a large proportion of secondary properties, also tend to own their own homes.

"Prices have skyrocketed since 2008, so a lot of equity will have been created there, as well," he said.