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Should I buy a cottage with friends or family?

MONTREAL — As cottage season dawns, the prospect of joint ownership with family or friends grows anew for many Canadians, budding perennially like a lakeside plant.
Muskoka chairs sit on a dock looking over Boshkung Lake, in Algonquin Highlands, Ont., Monday, Oct. 5, 2020. As cottage season dawns, the prospect of joint ownership with family or friends grows anew for many Canadians, budding perennially like a lakeside plant. THE CANADIAN PRESS/Giordano Ciampini

MONTREAL — As cottage season dawns, the prospect of joint ownership with family or friends grows anew for many Canadians, budding perennially like a lakeside plant.

Smaller down payments, lower risks and shared experiences all mark the promise of a property partnership with pals and loved ones.

But experts warn that a range of issues need consideration before diving into a cottage co-investment like a kid off the dock.

A candid conversation about finances, long-term life plans and use of the cabin are a good place to start.

"Be careful. Because these types of things can destroy families and relationships if not done properly," said Jamie Golombek, managing director of tax and estate planning with CIBC Private Wealth.

"Everything's working out great — and then there's a dispute later on or one person wants to get out of it or one person gets divorced. And all of a sudden things that they didn't anticipate start happening."

Independent legal advice for each of the parties as well as written agreements are essential, Golombek advised.

Ownership schemes are one key question, with joint tenancy and tenants-in-common arrangements as the two main options (in this case, the word tenant refers to owners rather than renters).

For joint tenancy, each owner has a stake in the property, and if one dies their share transfers to the other — similar to a spousal situation. (Joint tenancy with right of survivorship is not recognized in Quebec.)

On the other hand, a tenants-in-common agreement allows for different-sized stakes in the property — 75 per cent and 25 per cent, for example, as well as 50-50 — and would see the deceased's share become part of their estate and pass on to their heirs, who would then pay a probate tax (primary residences are exempted). The tax rate varies widely from province to province, ranging from 1.7 per cent in Nova Scotia to zero in Manitoba and Quebec.

"Probably the best protection is to own it as tenancy-in-common," Golombek said, referring to deals with siblings or friends. "Each of you has your own legal rights and ownership."

Further provisions or contracts dealing with unforeseen scenarios may be necessary, such as a first right of purchase should one investor die or simply want to sell.

"Who gets it on Canada Day long weekend? Is there room for everyone? What if one family is out of the country for a year, what happens to their usage during that year?" Golombek asked.

"Are you allowed to invite guests up? How many guests? Can you have guests up every weekend?" he continued, adding that a real estate lawyer can address these questions in advance.

Credit is another concern.

In a standard arrangement between co-owners, each is fully liable for the mortgage. That means a late payment or default will affect everyone's credit scores, says certified financial planner Mark Halpern.

Lenders will also average out the purchasers' credit scores, resulting in a higher-rate mortgage if one of the buyers has a lower rating. Moreover, the hefty debt burden could make it tougher to take out other loans.

"You've got to know who you're partnering with," said Halpern, who runs He said buyers might want to consider open mortgages, which offer more flexibility and refinancing options but also involve higher rates than closed mortgages.

"Some people want flexibility to pay it down early, because maybe they're going to get a big bonus one year or they're going to exercise some stock options. Whereas maybe the other co-owner is not in that type of job," said Golombek.

Co-ownership also becomes a prospect for children whose parents plan to leave a vacation property to their children, presenting a wealth of potential pitfalls.

"Who's going to pay the maintenance expenses?" Golombek asked. "Should each of the kids contribute to a slush fund?"

Renovations and improvements also factor in. "Let's say one kid wants to put in a new dock and the other kid thinks the dock is just fine. Let's say one kid wants to buy a nice boat and the other kid says, 'I hate boating.'"

Well-thought-out, detailed agreements can head off these problems, Halpern said. Parents may want to consider establishing a bank account ahead of time for maintenance or upgrades, or to set up a trust through their will.

In one case Golombek encountered, three children — two in Toronto and one in Vancouver — inherited a Muskoka cottage. "Of course, the kid in Vancouver had no interest at all ... It would have been much better if they had met us before the parents died and then they could have done an equalization" — where the two Torontonians each received a 50 per cent stake in the property while the Vancouverite got comparable value through other assets.

Co-ownership can offer an affordable way to jump into the cottage market. "But it's not without risks," Golombek said.

"Not just legal and financial, but also a risk to the ongoing friendship or relationship if not done properly."

This report by The Canadian Press was first published May 25, 2023.

Christopher Reynolds, The Canadian Press