You are a well-respected financial planning group, based in Markham, Ontario. Two of your longest tenure clients, who are permanent Canadian residents, Dr. and Mr. Lee, both age 66 live in Richmond Hill, Ontario and are concerned about the Capital Gains that are associated with their Family Cottage just outside of Peterborough, Ontario. Having a residence in the city and a getaway spot on weekends, and as much time as they could find throughout the summer season, has been such a cherished time while their children were growing up. They have had the cottage for 20 years, and they absolutely love it, and don't mind the approximate 90 minute drive (in good traffic) to get to the cottage.

As you know the family so well, the Lee's have a son, Henry age 40 who is married and is a Family Physician, and lives in Markham. The Lee's Son Henry is happily married to his wife of 10 years. Now that Henry's children are school age, the family love to travel to new places, and take full advantage of time off when the kids are out of school. The Lees also have a daughter, Kelly age 38, who is married with two children, and is running her own business and lives in Belleville.

Dr. and Mr. Lee come to you wanting to employ a strategy to transition the Capital Gains concerns of the cottage to their children before the burden of Capital gains attached to the cottage, that will need to be paid at the death of the second spouse, become so significant that the cottage would almost have to be sold to cover the taxes. An outcome that they don't want to consider.

In passing they mention that Kelly is frustrated with having to do the majority of the maintenance and upkeep at the cottage, which in their minds is a small price to pay to relax in such a wonderful place.

They have met with their accountant and discussed the implications of Principal Residence exemption, and terms like in-Trust, but are not sure of the details behind either of these.

They admit to only partially understanding the implications of this and were hoping you could clarify how this works with some basic explanations.

While recently meeting with their Accountant they recall hearing terms like deemed disposition, future growth / capital gains and probate fees, and weirdest of all Dr. Lee thought she heard the words /phrase "inter-vivos" which were all part of the conversation.

Residence - Richmond Hill - Purchased in 2004 for $500,000, FMV 2024 $1,600,000 Cottage - Peterborough - Purchased in 2004 for $100,000, FMV 2024 $600,000

(For the purposes of calculation assume the purchase price is the same as the ACB for each property)

1. What is the principal residence exemption, and why is it such an important tax planning opportunity for Canadians ? (2 marks)

2. In an effort to explain Principal Residence exemption to the Lees, you calculate what would be the most efficient way to deal with the Principal Residence exemption based on the values of each property, and the details of ownership for each as stated in the case study What amount of taxable Capital Gain would they be responsible for ? (to earn full credit show your work - 5 marks)

3. Why would utilizing an Inter-vivos Trust be a strategy that should be considered in this case? (4 marks)

4. Are there other options to consider (suggestion: answer this after reviewing both parts of this assignment) ? (4 marks)

5. What are the arguments for and against the Lees considering putting the Cottage in joint ownership with their children now ? (2 marks)